Weekly Market Round up - 11/11/22
Mid Term elections and CPI print lead to Dollar weakness, the UK on the brink of recession
It has been a busy week in the markets this week, with lots of volatility driven by a host of macroeconomic data and political headlines:
Starting with the Mid Term elections In the US, which took place on Wednesday; The Republican red wave has failed to materialise but right-wing governor Ron DeSantis of Florida, who would make a strong challenger to Donald Trump for the next Republican presidential nomination in 2014, has won a landslide re-election victory in Tampa.
Despite rampant inflation and President Joe Bidens low approval rating, the Democrats have avoided the heavy defeat that many anticipated. Although the Republicans are still expected to win control of the House, they look set for a majority of five seats or fewer. A narrow Republican victory in the House would spell the end for the domestic agenda of President Biden, and the potential for further big shifts in fiscal policy.
Following this, yesterday US CPI readings saw US inflation fall more sharply than expected last month, meaning traders are anticipating that the US Federal Reserve may not have to raise interest rates as high as feared. The US consumer prices index rose by 7.7% in October, down from 8.2% in September. That’s the lowest annual inflation reading since January 2022 – news that will cheer the Federal Reserve and the White House in the battle against inflation.
This news was deemed bearish for the USD but bullish for cable. GBPUSD returning to 1.1670, the highest level since mid-September and the biggest one day move since March 2020. The overwhelming dollar demand which has been so prevlant of late was sharply sold off following the CPI release yesterday afternoon.
This morning, rather bleak news following the latest GDP release; the UK economy shrank by 0.2% in the last quarter, putting it on the brink of recession. The Office for National Statistics reports that GDP fell in the July-September quarter, following a 0.2% rise in April-June. That’s less bad than feared, but still shows the UK economy is weakening as the cost of living crisis and rising interest rates hit the economy.
The UK services sector stalled in the July-September quarter, with no growth. Services output fell 0.8% in September, following growth of 0.1% in August and 0.5% in July. Meanwhile, UK manufacturing output tumbled as production output fell by 1.5% in July-September, which is the fifth consecutive quarter of contraction. This means the UK is on course for its quickest return to recession in almost half a century; If the economy shrinks in Q4, it would be the fastest return to recession since the mid-1970s, when there were only four quarters between recessions in 1974 and 1975.
Yet, despite the bad news, GBPUSD has continued to rally to 1.1772 this morning. GBPEUR is trading around 1.1436 and EURUSD is trading higher around 1.0250.