Challenging road ahead

View from the Trading Desk:

As winter approaches and energy bills look likely to rise again, the onus on governments across the globe to manage spiralling consumer costs has increased this week. Europe is on track to meet its gas storage capacity by November 1st, with plans to implement price caps in the short term. Longer-term plans involve decoupling gas and electricity prices, essentially limiting the effects of price changes in gas or electricity prices.


Source: Bloomberg

Across the channel, the UK is in a challenging position following the announcement from Ofgem that the energy price cap will rise by 80% in October, pushing the average household expenditure to £3,549 per year. The prospect of a new Prime Minister for Britain also adds another complex dimension as differing policy objectives could create potentially different outcomes regarding the inflation and growth outlook. Recent reports suggest that Liz Truss is considering a 5% cut in VAT which could cost more than £30bn, in addition to the proposed cut in national insurance and green levies.

Bottom line: UK inflation estimates are pointing well above 14% for January, when many expect price pressures to peak; in short, the outlook is bleak. If wholesale energy prices increase as much as expected, the scale of fiscal support needed could rise as high as £125bn through to 2024 if a deep recession is to be avoided, according to the Institute for Fiscal Studies. In truth, it’s difficult to see past further Pound weakness. Sterling has fallen over 3.5% against the US Dollar in August and is 9th in the G10 currency ranking for the same month, only being saved by the Swedish Krona.

 

The week ahead

GBP 

The beginning of this week is set to be a quiet period for UK economic data. Coupled with yesterday’s bank holiday Monday, it’s unlikely that ecostats will produce any significant movement for the Pound. However, the final reading of August’s Purchasing Managers’ Index for the manufacturing industry later this week has the potential to negatively impact Sterling if, as expected, it reveals a shrink in industry size. Meanwhile, other domestic news, such as the cost-of-living crisis and energy price cap increases, may continue to weigh on the Pound.

  • The British Retail Consortium Shop Price Index is due for release this Wednesday. Last month saw a 4.4% increase in BRC member retail stores.
  • Thursday brings with it the release of the Nationwide House Price Index m/m, with a 0.1% increase in the costs of homes and mortgages forecast.
  • The UK’s final August Manufacturing PMI data is also scheduled on Thursday, with an industry contraction projected.

 

EUR

This week will see some potentially high-impact data from the Eurozone, including the latest flash Inflation Rate and unemployment figures. The latter is expected to remain steady at a record low—which could benefit the Euro—while the flash Consumer Price Index data is predicted to rise in August from 8.9% to 9.0% year on year. This could fuel speculation on further European Central Bank rate hikes at the next meeting on September 8th. The focus over the next week will likely centre around how much the central bank will raise interest rates and, perhaps more importantly, whether the European Commission will meet in early September to address rising energy prices.

  • Earlier today, Germany’s preliminary CPI m/m increased 0.3% in line with expectations.
  • Both French preliminary CPI m/m and preliminary GDP q/q are due for release on Wednesday, with a 0.6% and 0.5% increase estimated, respectively.
  • Also, on Wednesday morning, the Eurozone CPI flash estimate y/y data will print.
  • The Eurozone’s unemployment figures for July will be released on Thursday. No change is expected from the previous monthly reading.

 

USD

The highlights this week for the Greenback will most likely be talks from Federal Open Market Committee members Loretta Mester and Tom Barkin. Comments they make have the potential to help rally the US Dollar if they hint at further interest rate hikes. Similarly, the latest unemployment figures could impact the Buck’s strength if, as predicted, they remain at record lows. Wednesday’s ADP Non-Farm Employment Change data release will be closely watched by investors as August figures are expected to show moderate gains, which might boost expectations for interest rate hikes in the US and further bolster the US Dollar.

  • Following on from Federal Reserve Bank of New York President John Williams’ speech today, his Cleveland counterpart, Loretta Mester, is also due to speak about the economic outlook and monetary policy at the Dayton Area Chamber of Commerce in Ohio.
  • The Institute for Supply Management Manufacturing PMI for August will be released on Thursday, with a small industry expansion expected.
  • On Friday, the Bureau of Labour Statistics will deliver the US unemployment figures. The data is expected to show the Unemployment Rate to remain unchanged at 3.5%.

 

If you'd like to discuss your foreign exchange requirements with one of our currency specialists, call us on +44 (0)20 3465 8200.