It has been a mixed week for risk assets, with oil and copper falling sharply on Chinese demand concerns. Markets are also trying to determine whether to lean towards the possibility of the Fed tilting to a more dovish stance amid expectations that inflation has peaked and in light of fresh concerns over China—something which weighed heavily on some commodities yesterday.
FX markets have been reluctant to punish the dollar meaningfully. St. Louis Fed President James Bullard on Thursday said interest rates need to rise further to a 5%-7% range. A day earlier, San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” As a result, the market’s pricing of terminal interest rates has gone back to 5% for May through July 2023.
On the other hand, pound rises despite gloomy U.K. outlook. The pound found additional support from a slight improvement in U.K. data, with retail sales topping estimates with a gain of 0.6% month-over-month. Additionally, jobless claims beat estimates earlier in the week, as too did wages data. Still, with annual inflation surging to 11.1% from 10.1% previously, real wages are falling. Consumer spending is thus likely to remain restricted.
In addition, Chancellor Jeremy Hunt announced £55 billion worth of tax rises and spending cuts - but how effective will this policy be? This week's PPI data will shed more light on the current state of the UK economy and expected policy changes. Currently, Composite PMI is expected to come in at 47.2, a drop from 48.2, Manufacturing PMI at 45.7, drop from 46.2, Services PMI at 48.0, down from 48.8. Therefore, in my view, their policy and the current economic state seems to be in a rout. We will need to continue to monitor what exactly is the main priority of the UK government. All in all, I think the downside risks will prevail for the cable.
FX markets have been reluctant to punish the dollar meaningfully. St. Louis Fed President James Bullard on Thursday said interest rates need to rise further to a 5%-7% range. A day earlier, San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” As a result, the market’s pricing of terminal interest rates has gone back to 5% for May through July 2023.
On the other hand, pound rises despite gloomy U.K. outlook. The pound found additional support from a slight improvement in U.K. data, with retail sales topping estimates with a gain of 0.6% month-over-month. Additionally, jobless claims beat estimates earlier in the week, as too did wages data. Still, with annual inflation surging to 11.1% from 10.1% previously, real wages are falling. Consumer spending is thus likely to remain restricted.
In addition, Chancellor Jeremy Hunt announced £55 billion worth of tax rises and spending cuts - but how effective will this policy be? This week's PPI data will shed more light on the current state of the UK economy and expected policy changes. Currently, Composite PMI is expected to come in at 47.2, a drop from 48.2, Manufacturing PMI at 45.7, drop from 46.2, Services PMI at 48.0, down from 48.8. Therefore, in my view, their policy and the current economic state seems to be in a rout. We will need to continue to monitor what exactly is the main priority of the UK government. All in all, I think the downside risks will prevail for the cable.