- Markets recover from relatively hawkish stance from BoE on Thursday
- Sterling will benefit against the euro from higher CPI surprises
- The inflation report for November will be released on Wednesday (7 a.m. Japan time).
The BoE was surprisingly hawkish last week.
Contrary to market expectations and the Fed setting the stage for a dovish central bank meeting, the Bank of England did not change course at last week’s meeting. Somewhat surprisingly, three BoE members continue to vote in favor of a further 25bps rate hike, which influences the overall rhetoric of the accompanying statement.
There was no press conference, but Governor Bailey’s comments after the meeting were supposed to be a cold shower on the market’s inflated expectations for a rate cut. However, the 110bps of easing expected by the BoE in 2024 is significantly lower than the 150bps rate cut expected by its neighbor the ECB, and despite similar efforts by ECB members to prevent markets from aggressively cutting interest rates. Regardless, the market seems to have made up its mind. I wish.
Data release remains important
This situation is unlikely to change soon unless the data turns negative quickly. So the data release still holds all the cards. Last week ended on a mixed note, with the strong services PMI overshadowed by the weak manufacturing PMI. The latter was not entirely unexpected, as the sector continues to be weak, as confirmed by recent manufacturing production data. They also need to take into account the effects of recent cabinet reshuffles (investment-hungry sectors such as manufacturing dislike political uncertainty) and the weakening growth sentiment seen in the euro area.
Moving on to this week, the November inflation report will be a key event. The next BoE meeting will be held on February 1st, including the quarterly monetary policy report, so we must accept that another inflation report will be published in mid-January 2024. That said, every data point is important, especially now that we are so close to the festive period, which has reduced liquidity.
Composite CPI is expected to further slow year-on-year growth to 4.4%, with the core index also expected to decline slightly to 5.5%. These inflation levels clearly do not correlate with central banks, which are assumed to be on the verge of embarking on aggressive easing campaigns, unless growth rates fall off a cliff. The final GDP figures for Q3 2023 will be released on Friday, but are unlikely to have any impact on the market and will be treated as “old news”.
In addition to the hawkish evidence, retail sales are expected to improve from low levels, with average earnings growth remaining above 7%. This trend will likely continue during the festive period, when spending is traditionally high. In this context, Friday’s November retail sales are expected to show -1.8% year-on-year growth, which could make the improvement in retail sales indicators excluding fuel stronger.
Sterling could benefit from stronger inflation reports
The pound has managed to outperform the euro since mid-November on the back of growing expectations for aggressive interest rate cuts from the ECB, pushing EUR/GBP to a three-month low. However, this outperformance appears to have run out of steam following the ECB’s unexpectedly hawkish stance at last week’s Governing Council meeting.
Focusing on this week and another small downside surprise in the UK inflation report could open the door to a longer-term rally towards the busy 0.8658-0.8720 area. On the other hand, stronger inflation, especially in the case of core CPI components, could make market expectations a bit more volatile, potentially pushing the EUR/GBP pair towards a three-month low below the recent GBP 0.8548. There is.