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GBP sells off versus the USD and EUR, despite the UK data pointing to stagnation rather than contraction

The pound didn’t enjoy a good week against the USD or EUR. That was despite some of the data suggesting the economy might have reached its worst and be starting to slowly improve, the Q3 GDP (Gross Domestic Product) figures pointing to stagnation rather than contraction, and the Bank of England indicating it is nowhere near ready to talk about interest rate cuts. This would suggest to me that the pound simply does not have the momentum to recover at this juncture, and favourable moves in GBPUSD and GBPEUR are more likely to come from problems in these economies rather than outperformance from UK data and survey releases.

Heading into the end of the year it looks increasingly unlikely in my opinion that the pound will be able to break back above $1.25 and €1.1650 against the USD and EUR respectively, and I would worry more that a move lower could challenge the bottom of the ranges around $1.20 and €1.13. That said, factors beyond the macroeconomic, particularly geopolitical risks, have not been as supportive for the USD as expected, so perhaps the range on GBPUSD might be even narrower?

This week sees a lot of big releases from the likes of the UK, US and Euroland. Over the course of the week, UK labour market figures for September and CPI (Consumer Price Inflation) and retail sales figures for October are released.

In the US, October consumer prices, retail sales, producer prices and industrial production are all due.

From Euroland, not only do we have the September industrial production aggregate released, but also German ZEW* figures for November and Q3 GDP and employment updates. A plethora of speakers from the UK (Breeden, Mann, Dhingra, Pill, Haskell and Ramsden) will have to compete with the likes of Guindos, Lane, Villeroy, Lagarde, Knot and Holzmann from the ECB (European Central Bank), and Golsbee, Jefferson, Williams, Barr and Daly from the Fed.

Perhaps though there will be greater focus on the latest batch of EU Commission economic forecasts, or the next battle between the Republicans and Democrats on the floor of the House of Representatives over the looming government shutdown. Could the latter of these prompt another reset in market sentiment towards the USD? Will the EU Commission remain optimistic about the outlook for 2024?

Meanwhile, the news remains dominated by events in the Middle East. Will there be any positive moves to bring about peace between Israelis and Palestinians, with efforts to obtain the release of Israeli hostages stepping up in recent days.

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

Central banks - Poland and Mexico opt to leave rates on hold as uncertainties over inflation remain

The last week saw the Reserve Bank of Australia hike its interest rate as expected to 4.35%, but the National Bank of Poland and Banxico (Mexican central bank) both left policy on hold, with the former having been expected to cut interest rates by a further quarter percentage point.

Concerns over the uncertainty surrounding consumer price inflation developments appear to be overriding concerns over economic weakness, but we did see an interest rate cut from the Peruvian central bank. The outlook for interest rates globally is for reductions, but many central banks could take their lead from what the Federal Reserve does.

This week sees a quiet calendar only interrupted by the central bank of the Philippines. It is expected to keep interest rates on hold, but the outlook for the region appears to be worsening, so interest rate cuts are on the longer-term horizon, in my view. 

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