The GBP endured a rollercoaster last week against the USD, falling initially to a new 37-year low at $1.1406 on Wednesday, before rallying above $1.16 on Friday, and continuing that rally in the early stages of this week. It was not the same story against the EUR, where it fell sharply throughout much of the week, and dropped back below $1.15 in the later stages of the week, and has tested fresh 3-month lows in early trade this week.

The cause of the weakness of the GBP was multi-faceted, in part weakness from some of the survey data released last week, also driven by events/data elsewhere, and finally by some revision to expectations of where and when UK interest rates would be tightened further. Notably, last week also saw the passing of Queen Elizabeth II on Thursday, who had been the ruling monarch for over seven decades. As a mark of respect to the Queen, the Bank of England announced it would postpone its Monetary Policy meeting from 15th to 22nd September.

For this week, there has already been the release of July activity figures for GDP, industrial production, services output and construction output. These recorded a modest bounce of 0.2% month-on-month for overall GDP, but only because services output grew 0.4% month-on-month, whereas construction output and industrial production both fell in the latest month. The activity figures were underwhelming, and do not bode well for the remainder of the quarter’s data. In the remainder of this week: labour market statistics for July/August, consumer prices data for August and retail sales volumes data, also for August. The data is expected to record a slowing in the pace of activity and perhaps a slight moderation in UK consumer price inflation.

Whether this will be sufficient to bring about a reduction in interest rate expectations, or any shift in the GBP, we will have to wait and see. For the time being, central bankers appear to still be more concerned about the risks to inflation/inflation expectations than growth. GBP’s bounce needs a lot more momentum before I’ll begin to get excited.

The European Central Bank (ECB) delivered a 75 basis point rate increase at its meeting last week and indicated that additional tightening would be forthcoming. The risks to inflation were still seen to the topside in the coming months/quarters, and the latest batch of ECB economists’ forecasts pointed to a persistent overshoot versus target through to the end of 2024. The suggestion from some quarters of the ECB is to raise interest rates significantly over the next few meetings, and get interest rates to their terminal rate as soon as possible. However, ECB President Christine Lagarde would not be drawn on where the peak in EUR interest rates would be, preferring only to indicate the ECB would move interest rates to where the data led them.

As far as the economy was concerned, last week saw more evidence of the pressure the Eurozone remains under. The final August services Purchasing Managers’ Index (PMI) reading was 49.8, down from an initial 50.2. The Sentix investor confidence index fell to -31.8 in September from -25.2 in August, and German factory orders for July reported a 1.1% decline after a drop in June as well. There were some positive releases from last week, but the signs of a slowdown are becoming more evident, and the risks of recession continue to grow.

The EUR has bounced against the USD, and also made headway against the GBP over the past week. The only question now is whether the EUR can maintain those gains, or if this is another false dawn. Given that the ECB appears to have greater conviction to tighten policy further, there could be a little additional strength in EURUSD, especially if US releases turnout as expected over the course of this week, in my opinion.

Signals from some quarters of the Federal Reserve, including comments from Chair Jerome Powell, suggest that the Federal Reserve is determined in its fight against inflation, and even a sharp reduction in headline consumer price inflation rates will likely be insufficient to prompt any significant change in attitudes from monetary officials.

Last week’s data and surveys recorded a weakening in August services PMI readings, but a strengthening in the Institute for Supply Management Indicator (ISM), another drop in mortgage applications for the latest week, but a fall in jobless claims also, and weaker consumer credit figures for July. Notably though it was the Fed’s Beige Book that took centre stage. This reported 9 of 12 districts reporting slowing price growth, and economic activity unchanged since July. They also noted a noticeable weakening in real estate conditions. Perhaps the Fed should also take note of the $6.1 trillion drop in household net worth in Q2. That was as bad as the slump seen in Q1, although this drop comes after several outsized leaps in 2020 and 2021. This was the largest nominal drop in household net worth since the data set was introduced. 

This week, attention is on the release of August consumer price inflation figures, then on August releases of retail sales and industrial production data later in the week. The Consumer Price Index (CPI) figures are expected to record a sizeable dip in the headline rate, whilst retail sales and industrial production are forecast to stagnate. That’s hardly supportive of significant additional monetary tightening, but the Federal Reserve wants to ensure inflation continues to fall before it ends rate hikes. As for the USD, it has given back some of its gains from the 21-year highs reached last week, and perhaps requires a period of consolidation. The risks for a global economic downturn still make the USD attractive for the foreseeable, in my view.

Last week saw the Polish, Canadian, Malaysian, and Peruvian central banks all hike interest rates, with the National Bank of Malaysia hiking by more than expected and the Peruvian central bank hiking by less. The Bank of Canada’s (BoC) hike to 3.25% from 2.5% also signalled that they will be more closely watching inflation expectations and global supply disruption in the future. Other central banks around the globe have also signalled that they may be entering an end game as far as the rate hiking cycle is concerned, and are becoming more concerned by the weakness in global economic activity. The BoC reiterated that interest rates would likely have to rise further, but notably indicated that the pace of demand was already slowing.

For this week, the Central Bank of Russia is the only notable meeting due. The Russian economy has suffered a sharp contraction in recent months, since the onset of the invasion of Ukraine. The rouble has also strengthened, at least at an official level, and that provides additional scope for the central bank to cut interest rates, which it is expected to do, bringing interest rates to 7%, the lowest level they have been at since the recovery from the pandemic back in 2021. However, this is unlikely to make any difference to the Russian economy’s performance, with sanctions still putting the squeeze on activity generally, in my opinion.