Market Report - 24/09/2024
Pound continues rally ; ECB to consider a consecutive rate cut?
Last week saw a lot of volatility in the FX market, following two central bank meetings and rate decisions alongside a host of macro-economic data releases, therefore I thought a brief update may be useful.
After gathering some momentum and rising 0.75% last week, the pound is expected to post further gains against the Euro in the coming days. Sterling has certainly been buoyed by a 'hawkish' Bank of England decision, robust inflation and retail sales data as well as rising global stock markets. When the MPC met last Thursday, there was an 8-1 vote in favour of ‘no action’ to the UK bank rate, which was different to the market forecast for a 7-2 vote. This was deemed more hawkish than expected and is one of the reasons behind the overwhelming GBP strength we saw at the back end of last week.
The Bank of England meeting preceded the Federal Reserve which took place Wednesday last week. The outcome of this was a mammoth 50bps cut to interest rates in the U.S, with Fed Chair Powell citing falling inflation and a tight labour market as driving forces behind this decision.
Following this cut, which was the largest seen by the FOMC in over 36 months, we saw a fast USD sell-off which pushed GBP/USD to 3-year highs north of 1.3340. Furthermore, the dollar has come under renewed selling pressure after two members of the FOMC signalled that the market was right to expect further interest rate cuts before the end of the year. Atlanta Federal Reserve president Raphael Bostic said "progress on inflation and the cooling of the labour market have emerged much more quickly than I imagined at the beginning of the summer."
This morning saw September results of both the UK and Eurozone PMI surveys released, which was the first significant test of the week for the GBP/EUR pair. The release saw GBP/EUR move higher and seemingly set itself up for another positive week, hitting new highs of 1.1960, as the UK reported a robust set of PMI data for the month that compared favourably against that of the Eurozone.
The UK Composite PMI index read at 52.9 in September, which is consistent with an expansion in economic output, although the figure was down on August's 53.8 reading by contrast.
This summer’s Olympic games may have given a brief lift, but this is now in the rearview mirror. There was also a notable decline in the manufacturing sector of the eurozone, where production fell for the eighteenth consecutive month and at the quickest rate of the year. Manufacturing has been one of the primary causes of the declining economic activity in the Eurozone.
In relation to the services sector, services-related businesses showed recent growth in the Eurozone. The European Central Bank may need to take into consideration a consecutive interest rate decrease next month, as the Eurozone reported easing cost pressures and a decline in employment intentions. European bond yields as well as the Euro may be impacted by the growing likelihood of another rate cut.