Last week, there was limited news from the UK economy, but the data and surveys that were released painted a pessimistic picture of conditions. First out of the gate was the November CBI (Confederation of British Industry) distributive trades survey, which reported a sharper drop in the reported sales balance. After that came the Bank of England consumer lending data. That reported a slowdown in the pace of borrowing for both unsecured lending and lending secured on dwellings, with perhaps the first signs of the effects of higher interest rates manifesting on these figures. There was also a sharp drop in M4 money supply growth in October, and then perhaps the most telling figures, the Nationwide house price survey for November. That recorded the sharpest fall in house prices, outside of the COVID pandemic, since the global financial crisis of ‘08/09. There was a positive piece of news in terms of the CIPS (Chartered Institute of Purchasing and Supply) manufacturing PMI (Purchasing Managers’ Index), as it was revised up in the final November reading to 46.5 from an initial 46.2, but that was still recording a fairly sizeable reduction in activity. Overall, the figures and survey data point to the sort of recession that the Bank of England expects, but the risk is this is only the beginning, in my view.

This week is even quieter in terms of UK data and surveys. There will be interest in the final November services PMI, the November BRC (British Retail Consortium) sales monitor and the RICS (Royal Institution of Chartered Surveyors) house price balance, also for November. However, the Bank of England’s inflation expectations reading for the next 12 months will be perhaps of greatest interest. If it rises above 5%, then that could compel the BoE (Bank of England) to continue expanding its monetary tightening regime, with the risk of a higher peak in interest rates. That might offer the GBP a little further support against the other majors, but the rally has been long and impressive already.

Specifically in terms of GBPUSD and GBPEUR, the rally seen last week, which took GBPUSD to a five-month high of $1.2310 and GBPEUR to within a whisker of €1.17, appears to be driven by external rather than domestic factors, in my view. A closer look at the UK economy might be cause for greater concern, limiting the additional upside that the GBP has, even if the Bank of England was to continue to increase interest rates. As we approach the end of the year, a reduction in liquidity could create greater volatility in FX rates, in my opinion. Meanwhile, the upcoming BoE meeting could see a greater degree of disagreement between the Monetary Policy Committee members.

Last week saw the US Federal Reserve Beige Book acknowledge that business pessimism was rising along with the risks of recession, and also that the prospects were for a prolonged period of sub-trend economic activity in the US economy as the Fed grappled with inflation. The data was, in the main, supportive of the slowing in economic activity, but the risks around the housing market and consumer spending were the most notably negative, with more weak housing market figures, this time from September S&P (Standard & Poor’s) house price data and the October pending home sales figures. However, the labour market data also threw in a few surprises for the markets, with a weaker ADP (Automatic Data Processing Inc.) employment survey for November. Also, a huge rise in the Challenger job cuts data, and signs of weakness in the employment component of the manufacturing ISM (Institute for Supply Management) index, which was superseded by a strong US payrolls report and higher average earnings growth.

Some quarters of the Federal Reserve’s monetary policy setting committee are becoming more nervous about the outlook for activity and the labour market, but the strength of headline payrolls will likely keep the US central bank hiking for the next couple of meetings at least. That should mean the Fed Funds rate reaches 5% at a bare minimum, with additional hikes likely if the consumer prices data shows greater stickiness in price inflation at a core level, in my view.

There is little data or survey evidence of importance due for release this week, and the US dollar would be unlikely to enjoy any strength from it in any case. The performance of the US dollar over recent weeks continues to indicate a clearing of the decks from markets that had built up dollar balances in previous months, and it is occurring irrespective of the data and survey releases in the US or other major economies. There could be further room for the US dollar to fall in the next week or so, as we head into the big week of central bank decisions from 12 December onwards.

Last week saw several important figures from Euroland released. A lot of the attention was on the November consumer price inflation readings that were due out, and these recorded a sharper than expected drop in headline inflation rates. The downturn in activity was recorded via a sharp drop in Euroland M3 money supply growth in October, weakness in Euroland November industrial confidence, a downward revision in the manufacturing PMI index for November from its provisional reading. However, it was the French consumer spending figures for October, which reported a very sharp fall in spending, that highlighted the problems for Euroland from an activity perspective. The Euroland CPI (Consumer Price Index) inflation reading for November reported the headline rate falling to 10% from 10.6% year-on-year, although the core rate remained at 5%.

The European Central Bank has an increasing headache to face. Higher interest rates will increase the downside risks to economic activity, but with inflation rates still in double digits, and core inflation 2.5 times the target level, further monetary tightening is still deemed merited. The risks of stickier inflation probably still beat the downside risks to the economy in terms of importance to the central bank, but it is becoming a more even contest in my view.

For this week, we’ve already had a small downward revision to the November services PMI reading from Euroland, an improvement in the reading for the Sentix investor confidence reading in December, and a larger than expected fall in Euroland retail sales in October. The remainder of the week sees German industrial orders and industrial production figures for October, which are expected to report another downturn. Nothing in these figures to worry the FX markets unduly, but equally, nothing to offer domestic support to the EUR either, in my view.

There wasn’t much from the central banking community last week to focus on. The Bank of Thailand hiked interest rates by 25 basis points to 1.25%, as expected, which provoked virtually no reaction from the markets. The Bank of Thailand might now slowdown the pace of rate increases, especially given the recent recovery in the Thai baht against the US dollar.

This week sees the beginning of a surge of central bank meetings. The RBA (Reserve Bank of Australia) kick things off, followed by the RBI (Reserve Bank of India), then the Bank of Canada, Bank of Brazil, central bank of Peru, and finally the National Bank of Poland. The scale of most rate increases, if there are any at all, is likely to be mainly of the order of 25-35 basis points, with the exception being the Bank of Canada which is expected to hike by 50 basis points. For most central banks, the pressing need for monetary tightening has been dampened by previous rate increases, and also the USD sell-off seen recently. The drop in energy prices has also been helpful in capping inflation rates at a headline level. Risks could even be for marginally smaller rate increases than predicted or a few surprise no-change decisions, in my view.