Market Report - 11/01/2024
US inflation springs surprise ; Focus shifts to UK GDP release
Following a day of prolonged volatility, US inflation has risen, in a blow to the White House ahead of November’s presidential elections. Consumer prices rose by 3.4% in the year to December, new data shows, as American households were hit by pricier housing costs and energy.
That’s up from an annual rate of 3.1% in November, when cheaper gas prices slowed the rising cost of living in America. Economists had expected a smaller rise, to 3.2%.
After statistics indicating that U.S. inflation picked up speed in December were released, the dollar gained ground against the pound, euro, and other major currencies. Core inflation decreased slightly from 4.0% to 3.9% y/y in December, but this was still greater than the 3.8% reduction that was widely predicted.
In the minutes after the announcement, the GBP/USD rate fell to a daily low of 1.2702, which was to be expected given the undershoot in inflation data. There has been an ever so slight improvement since then, with the cable pair currently trading near 1.2724 at time of writing. Investors and analysts will be keeping a keen eye on FOMC speakers later this afternoon to identify whether or not the US Central Bank will be moving further away from the thought that there was to be a rate cut on the horizon. In fact, money markets have now pared back bets for an imminent Federal Reserve rate cut, which has in turn lent some support for US Bond Yields.
The USD has started 2024 on a strong footing following the aforementioned expectations to scale away from interest rate cuts at the Fed over the coming months, in the face of evidence of ongoing strength in the U.S. economy. This will likely put a layer of support under the USD and frustrate the GBP/USD exchange rate's ascent, potentially capping it just above 1.28 for the foreseeable future.
On the euro, European Central Bank (ECB) Governor François Villeroy de Galhau said the French economy is slowing but is won't have a recession, adding inflation should slow below 3% in a few months and return to 2% by the end of 2025. It was however widely reported this week that the Eurozone in likely to fall into technical recession, following consecutive quarters of decline in overall GDP. This could see the EUR further weaken off if a technical recession is confirmed at any point.
Finally, taking a look at the GBP; tomorrow the focus shifts to the UK factory data and GDP data. UK GDP is set to be released at 7am, where the economy is forecasted to grow by 0.2% for the last month.
Should this forecast come to fruition, it would be a big performance indicator which shows the pound has started the new year on the front foot. The previous GDP release showed contraction in the UK economy by -0.3%, so taking into consideration a potential swing of 0.5% growth in the last two months – it could be increasingly likely to add major support for the UK currency.
From a macroeconomic perspective the Pound has enjoyed a relatively ‘under the radar’ start to the year, with very little being released for market makers to digest and trade off the back of. This is set to change with the release of Factory Orders and UK GDP tomorrow – and extended volatility is widely predicted.
CPI figures are also due to be released next Wednesday, again at 7am. Inflation will be very closely watched by investors, having been the focus for much of 2023 and what is holding interest rates higher for longer. A drop in this figure could force Andrew Bailey’s hand to move away from his recent strategy of pausing on rate moves, with early result indications remaining unclear. It is important to note that Deutschebank are forecasting UK inflation to fall to near the BOE’s forecast of 2% by the summer.