Hiking in the face of recession


Recovering from political upheaval

Sterling has recovered today following some selling last week on the back of news that Rishi Sunak is the front-runner to become the next UK Prime Minister. Markets view his fiscal policy approach as more prudent, and with proposed borrowing by former PM Liz Truss looking like it's off the table, worsening of the fiscal deficits should be avoided. In terms of economic data, UK manufacturing and services stats came in lower than forecasts had anticipated, noting contractions in the sectors in October. In the week ahead, Monetary Policy Committee member Dave Ramsden will be testifying this afternoon in front of the Treasury Select Committee. Meanwhile, BoE Chief Economist Huw Pill will be speaking tomorrow about the cost of living crisis. 


ECB's monetary policy meeting ahead

Attention this week will be on the European Central Bank and its upcoming monetary policy meeting. It's expected that the central bank will make a second consecutive 75 basis point interest rate increase, with Eurozone inflation at lofty levels of 9.9%. However, other data hasn't impressed, with today's combined gauge of the manufacturing, services, and industrial areas of the economy reaching a 23-month low of 47.1. Any figure below 50.0 denotes contraction, and the data seems to further suggest a recession is on the way. In the rest of the week, inflation data from a selection of European countries will make their way onto the market. 


Smaller rate hikes? 

By the end of last week, markets were abuzz with talks about the Federal Reserve and whether it would opt for smaller interest rate increases going forward. Markets currently anticipate a 75 basis point rate hike in the November meeting, and a 50 basis point hike in December, with expectations for a terminal rate between 4.5% and 5.0%. In the week ahead, manufacturing and services data will be out this afternoon, while Consumer Confidence stats will reach markets on Tuesday. This week's high-influence data will include US Advance GDP stats with details of how Q3 growth performed. Markets are expecting a 2.3% gain in the quarter. To end the week, The PCE Price Index will also print, and is due to show an increase of 0.5% in the month of September. 


Decreasing disposable income

Last week, the Pound fell versus the New Zealand Dollar and Australian Dollar, as UK politics continued to create havoc in markets. Meanwhile, the Reserve Bank of Australia has issued a reminder that it's increasing interest rates in a bid to cut household disposable income. Most mortgages in Australia are interest only, so the central bank's approach to monetary policy is slightly different. If interest rates are higher, the mortgage payments are, too, leaving less disposable income, which is hoped to limit demand and inflation. RBA Assistant Governor Chris Kent has said: 'We're going to be monitoring the effects of increased rates on household spending, and remember, we do actually want it to have an effect on household spending, to rein that in somewhat.' In the week ahead, Australian inflation data and New Zealand Business Confidence stats will be released. The Reserve Bank of Australia will also release its Annual Report. 


Hiking in the face of recession

The Canadian Dollar has slipped this morning as oil prices soften on the back of concerns about the global growth outlook. The Bank of Canada is expected to hike by 50 basis points on Wednesday, despite further noise around the possibility of a recession. Another rate increase would mark the sixth consecutive move higher as the central bank attempts to tame inflation which is sitting at multi-decade highs. A follow-up press conference will take place as well as the release of the monetary policy report. Other events will include the Canadian growth stats on Friday as well as wage data on Thursday. 

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