EM Market Report London

UK growth in focus this week

Thanim Islam
Thanim Islam 07 November 2022

GBP: Dovish hike continues to weaken pound

EUR: Euro back in demand

USD: Midterms and inflation in focus

Sterling

Friday's only data point was the construction PMIs which came in better than expected at 53.2, with the sector growing at its fastest pace in five months in October. However, new orders and business optimism dropped sharply. The data adds to the better than expected composite PMIs from earlier in the week.

Taking into consideration the dovish rate hike by the Bank of England on Thursday, sterling overall had a negative week dropping by 3% against a basket of currencies.

 Data points this week are slim on the ground, with the British Retail Consortium releasing their retail sales report for October on Tuesday morning, and main focus will be on Friday's GDP figures. The Bank of England warned last week that the economy is likely to suffer eight consecutive quarters of a recession. The battle now it seems for the government and the Bank of England will be how they can stop a severe recession in the UK. Current estimates put growth for the third quarter at -0.1%.

 This morning Halifax confirmed that house prices fell the most in two years due to rising mortgage rates and a gloomy outlook for the economy.

Until the GDP data comes out on Friday, sterling seems likely to be dictated by risk appetite.

Euro

Composite PMIs from the eurozone came in better than expected, but still remained in contraction territory.

Following on from Friday's US job numbers and the possible cracks showing, we saw a big reversal on EURUSD with the euro retracing losses from the 3 days prior. The move of the euro higher versus the US dollar also caused euro strength all round, with the GBPEUR now at the lows seen at the end of October.

Of concern for clients needing to buy euros from sterling will be the fact that the uptrend that we’ve seen on the GBPEUR pair since the lows in September now looks broken, indicating more loss could be seen.

Data this morning from Germany showed that industrial production surprised to the upside, growing by 2.6% in September, up from 2.1% in August, adding to the euro's strength this morning.

USD

Friday's job data was a mixed one. Initially the dollar rallied on the back of seeing 261,000 jobs being added in October and average hourly earnings rising as well. However, unemployment rose more than expected up to 3.7% in October from 3.5% in September. Following the initial spike in the US dollar, we then saw a big sell-off of the currency going into Friday's close.

Following the hawkish Fed meeting on Wednesday, it seems that markets were positioned very long on the US dollar, and given the jobs report wasn’t as solid as markets were hoping for, it seems we saw profit taking from Wednesday's Fed meeting, and markets took stock ahead of this week's key inflation data and US midterm elections.

Historically during midterms, we have seen equities rally and the dollar soften due to the result ending up in a split congress, meaning fewer changes fiscally to allow business to carry on as they have before. So, it will be interesting to see if this happens this year, or whether markets continue to be moved by Fed policy.

On Thursday, inflation is forecasted to drop from 8.2% to 7.9% with core inflation expected to slow marginally to 0.5%. The latter is still key for the Fed and it would take a big drop in core inflation in order for Fed policy to change, and thus to see a weaker US dollar.

The dollar has opened slightly stronger this morning as China health officials said China will maintain its current zero covid regulations, refuting claims from last week that China could be looking to ease restrictions. For the rest of the day look out for Fed Mester and Fed Collins' speech.

Chart of the day

As mentioned above, a combination of the Bank of England's dovish rate hike, concerns with recession, and the rebound in the euro has taken GBPEUR to new low, and seen a break of the downtrend since the end of September.

It looks like the pairs could be susceptible for further weakness.

07112022 cotdSource: Bloomberg Finance L.P.

Market rates

Today's interbank rates at 08:54am against sterling rates last Friday.

Euro

€1.142

US dollar

$1.139

Australian dollar

$1.767 -

South African rand

R20.38

Japanese yen

¥167.5

Have a great day.