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The scale of the challenge ahead

View from the Trading Desk:

Regardless of your thoughts on the constitutional monarchy, the death of Queen Elizabeth has encroached on the stability of a nation already facing profound economic and political challenges. For the UK's new Prime Minister, the challenges of the post-Boris Johnson era will have been daunting enough, without having to steer a politically polarised nation through this moment of historical significance. For Liz Truss—who enters her first full week in the job with a nation in mourning—restoring a sense of calm will be priority number one. She will, however, be acutely aware that time is running out to tackle key issues before the next general election must be called in two years' time.

Prior to the announcement, news that the new Conservative government would cap energy bills at £2,500 per year for consumers certainly brought some relief, with the measure expected to shave around five percentage points off headline inflation figures. It also restores a sense of credibility to the government, which has been missing in action in recent months. While lacking charisma, Truss can at least be expected to work hard as Britain's PM to deliver her own brand of pro-growth, low-tax Conservative policy more akin to Thatcherism (without the cuts to public spending). Still, markets will wait with an air of cynicism, keen to see how the Treasury plans to balance the books in coming years.

Looking to markets, the Pound has meandered since the beginning of September, with trade-weighted Sterling operating in a 1.3% range in that time. In the past week, the UK's currency has mostly been a passenger of Euro and US Dollar-driven dynamics, with the European Central Bank's jumbo rate-hike and more hawkish rhetoric feeding through to a stronger Euro. Meanwhile, the Greenback has pulled back around 2.5% from multi-decade highs as markets expect yield differentials between the Federal Reserve and other major central banks to narrow. Despite recent moves, it doesn't feel as though a sustained Dollar pullback is in the offing, especially as the Fed continues to battle to bring inflation down.

Bottom line: While headlines pertaining to energy bills, food prices, and workers' strikes will disappear for the next week or so, they won't be gone forever. The new Carolean-era Britain needs to figure out which direction it wants to take to restore growth, bring down inflation, and finally tackle Brexit. We daresay the return of UK market confidence hinges on all three being solved.


The week ahead


The Pound has recovered some of its losses against the US Dollar over the last few days, retesting the $1.17 handle as Prime Minister Liz Truss looks set to inject some fiscal support into the system as energy bills soar. The question then turns to how long this borrowing will persist, with investors turning away from the UK and yields on government debt at their highest levels for a decade, the resulting debt snowball could pressure the Pound further if borrowing spills over into the latter half of 2023. GBP/EUR retested the June lows this morning as markets turn more hawkish on the European Central Bank's hiking cycle. 

  • The UK Claimant Count Change for August will be released on Tuesday, with analysts expecting a -13.2K print versus -10.6K in July. 
  • The Unemployment Rate is projected to remain unchanged for the month of July at 3.8%.
  • UK CPI YoY for August is forecast to print at 10.0% compared with 10.1% in July. 
  • To close out the week, UK Retail Sales MoM for August will be published with consensus pointing to a -0.4% reading. 



The Euro jumped 1% against the US Dollar this morning as bets of further interest rate hikes by the European Central Bank gather pace following a 75 basis point move last week. The Euro has strengthened the most since March as bearish sentiment on the common currency resulting from Russia's invasion of Ukraine and dire energy market conditions have helped limit any meaningful reversal. Gains in the Euro have also been fueled by reports that Ukraine is making positive progress in retaking Russian-occupied regions in the eastern part of the country, lifting risk sentiment.    

  • The latest German ZEW Economic Sentiment data will be released on Tuesday. A -60.0 reading is expected as pessimism on the current outlook persists. 
  • ECOFIN meetings are scheduled to take place all day Tuesday. 
  • Eurozone Industrial Production MoM for July looks set for a 1.0% decline compared with a 0.7% gain in June. 
  • Final CPI data for August will be published at the end of the week, little change is expected from the lofty 9.1% YoY print. 



Dollar weakness continues into this week following an uplift in risk sentiment ahead of the US reporting CPI data tomorrow. Another weak CPI print is expected by economists, calling into question whether a further 75-basis point rate hike will be warranted at the Federal Reserve's next meeting on the 21st of September. Fed officials still seem steadfast in bringing down inflation, with Chairman Jerome Powell reiterating the central bank's commitment to containing price pressures and board member Christopher Waller emphasising that more time is needed to see if a persistent downtrend is observed. US equity futures are higher this morning, with the S&P gaining 0.50%. 

  • US CPI and Core CPI MoM for August will be released tomorrow; readings of -0.1% and 0.3% are expected. 
  • The Empire State Manufacturing Index looks set for another decline of -13.9 in September. 
  • Retail sales MoM for August is projected to remain unchanged for a second month at 0.0%. 
  • On Friday, preliminary University of Michigan Consumer Sentiment data will be published; forecasts point to a 60.0 print. 


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