GBP struggles as UK enters recession

Good morning

Not a vast amount of movement in the currency markets to report from yesterday.  GBPUSD had traded down to around 1.2535, EURUSD to 1.0695 but both ticked a little higher overnight, a weaker USD after comments from Fed officials seemed responsible for the move.  Powell said the US inflation data was in line with Fed expectations and Goolsbee warned against getting too hung up on one release.  EURUSD reached 1.0735 and GBPUSD just managing to reclaim 1.2600. 

Softer UK GDP figures out early this morning sent GBPUSD back towards yesterdays lows, but has so far held around the 1.2550 area.  With EURUSD unmoved, GBPEUR is lower, now 1.1690, although as with GBPUSD there are signs the move has run out of steam.  GDP came in at -0.3% (expected -0.1%) means we have now seen two quarters of negative growth which by some measures puts us in a recession.  BoEs Bailey had warned a couple of days ago about a possible shallow recession, he hinted it could be short-lived but for now we’re  not looking great. 

We’ll be hearing from BOEs Greene and Mann today.  Greene had previously voted for a rate rise but chose to keep rates on hold at the latest meeting, Mann had again voted for a rate rise but has since said it was a close call.  After the softer inflation print and todays GDP data I would not be surprised to hear more dovish noises from Mann.  

UK are not the only ones struggling.  The German economy minister has said the German economy is ‘dramatically bad’, and there is talk their 2025 GDP forecast will be cut from 1.5% announced in October to just 1%.  Meanwhile S&P have cut ratings of the German bank PBB over concerns of their exposure to commercial real estate.  There is surely more bad news to come from ‘CRE’.  ECB rate cuts required perhaps, but a typically hawkish ECBs Nagel has warned against the risk of cutting rates too early.

Japan is also in recession according to numbers released overnight.  USDJPY is off those recent highs but still holding just above 150.00, it is possible this data could push back timings of a move away from negative rates, indeed market pricing of a rise in April is coming in lower but still around 65%, down from around 75%. 

With the Ukraine war, the Middle East crisis, North Korea’s missile testing and China keeping a close eye on Taiwan, the world could really do without any more conflict.  However the US are reporting that Russia are planning to put nuclear weapons into space, a move they would regard as a grave threat to vital US satellites.  War in space?  Should make a film about that.

In sport, England are currently taking on India in the third test.  England took early wickets to leave India on 33-3 but a decent batting spell has seen a recovery to 185-3. 

Finally, London’s tube map is facing something of an upgrade as six overground lines have been renamed and given new colours to bring them more into the TfL fold.  The lines have been given the names Lioness, Mildmay, Windrush, Weaver, Suffragette and Liberty, all following historical events in the areas the lines serve.  The changes will start immediately but the full rebrand won’t be rolled out until August.  Some see this as making travel a bit easier, for me it is a sign of London’s expansion over the years.  

Plenty of US data on offer today, along with various central bank speakers.  Early tomorrow morning we’ll see UK retail sales, these looked terrible last month and are not expected to look much better this time around.   

-  12.00 ECBs Lane speaks

-  13.00 BoEs Greene speaks

-  13.30 US retail sales, philly fed survey, initial jobless claims

-  13.50 BoEs Mann speaks

-  14.15 US industrial production

-  18.00 ECB’s Nagel speaks

-  18.15 Feds Waller speaks

-  21.30 NZ business PMI

-  07.00 UK retail sales

US and UK inflation readings catch market on the wrong foot

Good morning, and a Happy Valentine’s Day to you all. 

Yesterday I mentioned that forecasts saw US inflation lower and UK inflation higher, and I surmised therefore that the risk for GBPUSD must surely be to the upside.   It couldn’t have been further from the reality.  US inflation came out higher than expected (3.1% vs 2.9% and core 3.9% vs 3.7% expected) which sent USD marching higher.  The S&P 500 was down nearly 1.5% by the close, back below 5,000.  The Adobe digital price index that I mentioned last week turned out to be an accurate indicator once again.  The higher inflation numbers yesterday combined with the strong US employment numbers must surely make even the most dovish of officials rethink their position.  Looking forward  to the updated ‘dot plot’ out in March.

This morning UK inflation has come in below expectations, sending GBP lower.  GBPUSD was up at 1.2680 before the US release, pushing below 1.2600 in the afternoon before ticking back above 1.2600 overnight.  It was 1.2610 before the UK release.  Now 1.2550 as I type.  GBPEUR had traded up to 1.1765 overnight but slipped back to 1.1735 as those UK numbers were revealed.  EURUSD fell yesterday as well, trading from 1.0795 to 1.0705, pretty much where we trade now. 

So it looks like the Fed were right in saying it was too early to be talking about rate cuts and that three rate cuts this year is likely, well below recent market pricing.  The UK numbers are promising but with headline at 4% and core CPI still up at 5.1% it is too soon to be thinking about rate cuts.  By contrast it is possible EU GDP numbers this morning point towards the potential for earlier and faster paced ECB rate cuts

USDJPY took advantage of the stronger US data, taking the opportunity to break up through the 150.00 area and onto a high of 150.85 before settling back in the 150.50 area.  This move, together with an overall rise in USDJPY of some 10 big figures this year now, should be enough to see tougher talk form Japan officials, but so far we’ve really only been treated to more of the ‘we are closely watching currency levels’.  However, any intervention other than verbal still seems to be some way off, but they have surprised before.  The previous high was in Nov last year when it reached high 151s, the same area as the high from Oct 2022.  We have to go back to mid-1990 to see higher levels than that.  Surely its time to look at the downside.  But how many times have I said that?

The weather here is pretty miserable, a bit cold and drizzly.  But spare a thought for our friends just over the pond in eastern US, where a powerful storm has brought the most snow they have seen in two years, some areas are reported to have had 15 inches of snow in one day.   Mind you, spare a further thought for those poor people in the UAE, who have been hit with hefty hailstorms which caused damage to homes and vehicles.  Didn’t expect to see that!

The US have finally agreed a US$95bn package of aid for Ukraine, Israel and Taiwan, the bulk of which I would imagine would go to Ukraine, where Russian forces seem to be making worrying inroads into areas previously won back by Russia.  The Ukraine counter-offensive that was widely touted around June of last year didn’t appear to have the impact they were hoping for.  Meanwhile in the Middle East, negotiators have so far failed to find any grounds for a ceasefire acceptable to both sides.   

Champions League football produced wins for Man City and Real Madrid yesterday but Mark was more interested in the Championship where his teams, Leeds won 4-0 to put them into the automatic promotion places after Southampton lost Bit of a quandary for him down on IoW with plenty of Southampton fans, but he’ll be in a good mood today if anyone needs anything doing, it’s a good time to ask.

EU GDP today as I mentioned, we also have several central bank officials speaking and then early tomorrow morning we’ll get the latest UK GDP numbers.  Will we get a pleasant surprise from those numbers to follow the softer inflation readings? 

-  08.30 ECBs de Guindos speaks

-  10.00 EU GDP, industrial production

-  14.00 ECBs Cipollone speaks

-  14.30 Feds Goolsbee speaks

-  15.00 BoEs Bailey speaks

-  17.00 ECBs Nagel speaks

-  21.00 Feds Barr speaks

-  23.50 Japan GDP

-  00.00 AUD inflation expectations

-  00.30 AUS unemployment

-  07.00 UK GDP, industrial production

Potential for US inflation down, UK inflation up

Good morning

All was quiet through yesterday, and with some Asian markets still on holiday it was reasonably quiet overnight as well.  Japan shares reopened after their holidays, Nikkei pushing up almost 3%.  China remains closed for their new year holidays.  This morning we have seen the latest UK employment numbers which brought a lower unemployment rate and higher than expected average earnings.  GBP has been given a boost as a result, GBPUSD is up to 1.2655, pretty much where it topped out yesterday, while GBPEUR is just a  pip or two shy of 1.1750. 

US inflation numbers will be the key today and there is a lot that could happen here on their release.  A soft reading, particularly one softer than expected, could see USD drop and US stocks extend from their highs.  Conversely, if inflation disappoints to the upside, USD is likely to push higher and US stocks should fall.  It possibly isn’t quite as binary as that, but that’s how it feels.  It is difficult to know where the bigger impact for markets is.  The Fed have done a good job of making it clear they are in no rush to cut rates even though they are aware inflation is falling, so in terms of rate expectations I’m not sure we’ll learn a lot from todays release. 

Tomorrow morning we will have UK’s inflation numbers.  These are expected to show a bit of a rise from last time around which is helping support GBP but must be well priced in already.  I still feel the bigger risk is higher GBPUSD, I can imagine UK inflation coming in hotter and US inflation looking softer.  GBP would likely make gains against EUR if this were to be the case. 

However we know it is incredibly difficult to forecast direction.  Take New Zealand, it was only last week the talk was of higher inflation and higher rates, yet overnight their inflation expectations came in lower than expected and sent NZD lower as a result.  GBPNZD is now back above 2.0700 which is where it was before the ANZ research article that triggered the NZD buying.   

Another factor that could hold back GDP is the idea of a recession.  BoEs Bailey spoke yesterday and said that any recession is likely to be shallow and that there are signs of some sort of upturn, although it does a clue that BoE are eyeing the possibility of a recession.  UK GDP numbers are out Thursday morning to add to an already busy week of data. 

Romania are expected to keep their rates unchanged at 7% at todays meeting, we will see their latest inflation report as well which may give clues as to future rate paths.  I’d expect rate cuts later in the year, perhaps to coincide broadly with ECB cuts.

One of my least favourite ‘currencies’ if I should even call it that, is Bitcoin.  Still, while I may not be the only one who doesn’t like the imaginary asset, others are happy buying it and have pushed the price above $50,000 for the first time since December 2021.

Elsewhere, eyes are of course on Israel/Gaza where, after no ceasefire agreement was to be found, Israel have resumed their attacks in Gaza, now targeting Rafah in their attempts to remove any remaining Hamas factions, despite some criticism from other countries.  I can’t see either side backing down, Israel seem to have made it clear they won’t stop until the hostages have been released, while Hamas won’t release hostages unless Israel withdraw from Gaza.  A compromise doesn’t look likely although there are some suggestions that Mossad and the CIA will be discussing a hostage deal later today.

In sport, Chelsea grabbed a very late win over Crystal Palace yesterday evening, Pochettino keeps his job for another week or two.  The midweek football is really focussed on Champions League which Spurs cleverly managed to avoid, choosing instead to concentrate on the league! 

Otherwise, little to write about, sit back and wait for the US data this afternoon and the volatility that may, or may not, come with it. 

-  10.00 German ZEW

-  13.00 Romania rate announcement

-  13.30 US CPI

-  07.00 UK CPI, RPI, PPI