GBP lower and looks like more weakness to come

Good morning

A very warm welcome to 2025, indeed this morning is a touch warmer than many we’ve had since the turn of the year, the first one in a while where the garden hasn’t been completely white with snow or frost.

I know I’m a little late to get back into the swing of things this year.  I thought I’d treat myself and ease into 2025 gently.  Probably not the right time as it turns out, the first full working week of the year saw some pretty hefty moves.  Most notably we have a stronger US dollar, given an additional boost on Friday by a stronger than expected US nonfarm payroll release which has in turn led to revised forecasts of FOMC rate moves.

The push higher in the US dollar comes at the same time as board weakness in GBP, a reflection of the alarming high cost of borrowing faced by Starmer and his gang after the budget last year, indeed we have seen the highest cost of borrowing since before the global financial crisis of 2008.  UK gilt prices have collapsed, UK growth expectations have fallen and it would appear that more BoE officials are considering rate cuts.  Meanwhile Chanellor Reeves has made it clear that her fiscal rules set out in the budget are non-negotiable.  Its looking bleak for GBP.

Before the budget last October GBPUSD was trading around 1.3400.  By the end of October it was 1.2850.  Through November we hit a low around 1.2500 but December saw a rally back up to 1.2800.  By the end of the year we in the mid-1.25s and as I type GBPUSD is 1.2145.  It is fair to say that some of this move has been triggered by the stronger US dollar. 

Over the same time period EURUSD has dropped from over 1.10 to around 1.02.  But it is GBP that has suffered more, if we look at GBP against EUR we see current levels around 1.1880, the lowest for two months but perhaps more importantly nearly 200 points below levels seen just in the middle of last week. 

Whether this turns into a Truss/Kwarteng type collapse in GBP remains to be seen.  I don’t like to be a scare-mongerer, but I am very concerned about this move, I can’t really see where it will end and we are near enough key downside levels in GBPUSD and GBPEUR that, if broken, could see renewed selling and sharp declines.  Anyone thinking this can’t happen need only look to Sept 2022.

So, what else has been happening?  Obviously the LA fires are in the headlines.  I’ve been there a couple of times and know some of the areas that have been devastated, the scale of it is quite difficult to comprehend.  There are a lot of suggestions the fires were started deliberately, and there is unhappiness over California’s water management which may have adversely affected firefighting.  Strong winds are helping to fan the flames and spread the fires.  It’s not looking good. 

I had been looking forward to watching the launch of Jeff Bezos’ Blue Origin this morning, a reusable space rocket to rival Musks SpaceX.  However the launch has been postponed over some technical issues, so far we have had no confirmation of a new date.

In sport, the FA cup is in full swing, Spurs only scraped an injury time win against National League’s Tamworth in a very poor display, more disappointing as it came on the back of a brilliant performance against Liverpool in the first semi-final leg of the League Cup.  Not sure I’ve ever seen a side so capable of being so good or so bad.  Spurs next match is against Arsenal in the league. With one point from their last four league matches, we wait to see which Spurs team will turn up.  Tomorrow’s match between Liverpool and Notts Forest will be interesting, Forest have won their last five league matches and are flying high in joint second place.  Another win would stop Liverpool extending their lead at the top of the table.

That’s about all for now.  Not much in the way of economic data today.  UK and US CPI inflation numbers Wednesday, and US and UK retail sales Thursday and Friday respectively are certainly the main events this week but focus is more likely to be on how low GBP can move and how quickly it can get there.  Buy your GBP puts here…..

-  19.00 US monthly budget statement

-  23.50 Japan current account

Dovish BoE sends GBP lower

Good morning

Three of the nine BoE officials voted to cut rates yesterday, not enough to win so rates are held at 4.75%, but enough to offer more of a dovish sentiment than the market was expecting.   GBP duly dropped, GBPUSD which had been up around 1.2650 fell initially to 1.2585, only to then be given another push lower as USD strengthened after a stronger than expected US GDP release.  Ramsden and Taylor joined Dhingra in calling for a rate cut.

BoE are still concerned about upside inflation risks but they are now equally concerned about weak demand going forward that could upset the economy and push unemployment higher.  The recent budget is also likely to hamper growth, with GDP forecasts for the final quarter of 2024 cut from 0.3% to 0%.  Bailey gave no real clues as to the rate path for 2025, but market pricing of three 25bps cuts seems reasonable for now, starting with a possible 25bps cut in February. 

Disappointing UK retail sales numbers this morning have helped GBP move even lower.  GBPUSD fell further to 1.2475 overnight, while GBP crosses also shifted lower.  GBPEUR traded lower from a high yesterday around 1.2160 to current levels around 1.2035, while against AUD, NZD and CAD we’ve seen GBP drop to 2.0025, 2.2165 and 1.7980 from highs yesterday of 2.0300, 2.2400 and 1.8230 respectively.  Quite an impact. 

USDJPY continued its march higher, trading up to almost 158.00 overnight, however higher than expected inflation numbers from Japan, plus some carefully worded comments from Japanese FinMin Kato and top currency diplomat Mimura  about ‘sudden, one-sided FX moves’, saw Yen regain some its losses, USDJPY now 156.90.  A BoJ rate rise in March still looks more likely than January.

Spurs beat Man Utd to claim the last of the league cup semi-final places.  Spurs were 3-0 up but of course had to make life difficult and Man Utd fought back strongly late on, leaving the final score at 4-3.  Never a dull moment with Spurs.  This weekend brings premier league action, the highlight is likely to be Spurs v Liverpool, obviously I’ll not be expecting too much from that.

This weekend we have boxing as Tyson Fury once again takes on world champion Usyk on Saturday night.  Could be quite a thrilling bout and certainly one to stay up for.

We’ve had the key data this week and certainly plenty of volatility.  US core PCE this afternoon could create one final blast of USD movement, surely after that we can begin to wind down for the holiday period?

-  13.30 US Core PCE, personal income/spending

-  13.30 CAD retail sales

-  15.00 US Michigan sentiment survey

-  15.00 EU consumer confidence

FOMC cut but hawkish tilt send USD higher, stocks lower. BoE next up....

Good morning

The Fed did indeed cut rates 25bps to 4.5% as widely expected but the US dollar did push higher and US equities slumped as the interest rate projections, or the dot plot, suggested higher rates than previously forecast through 2025, 2026 and beyond.   Just over 50bps of cuts are now forecast for 2025, down from over 1%, indeed now we are looking at total cuts of just 1% to end 2026.  The repricing saw USD shift higher with EURUSD trading down to 1.0345 and GBPUSD to 1.2560. 

Powell sounded hawkish when he spoke, saying the economy and policy were in a very good place, while the Fed don’t think the unemployment rate will rise further.  Powell said the rate decision was a close one, with Hammack actually voting to keep rates unchanged.  Fed have now lowered rates by a full 1% from their peak and Powell has made it clear they will be more cautious with regards to further cuts. 

USD is brushing off reports that we could see a government shutdown as soon as Saturday after Trump said he opposed a stopgap funding bill but perhaps the sharp move lower in US equities reflects that risk more.  Historically I don’t believe US government shutdowns, as frightening as they sound, have negatively impacted USD to any great extent.  I have no doubt someone will prove me wrong on this but that’s my gut feel.

Overnight BoJ kept rates unchanged again as widely expected, USDJPY which had already gained after the FOMC made further gains, lifting up to 156.60 this morning, coming from lows below 151.00 just a week or so ago.  One member, Tamura, did vote to raise rates by 50bps.  Overall the economy is in line with expectations but BoJ did make it clear they are expecting inflation to rise and as such I think the Jan BoJ meeting is one to watch.  For now though, Yen weakness is the key.

NZ GDP overnight very much disappointed, coming is considerably lower than expected with a hefty downward revision to the previous months data as well.  No surprise that NZD fell on the report, GBPNZD traded up to 2.2400, over 300 points off yesterday morning levels, while NZDUSD was hit be a combination of the stronger USD and weaker NZD, reaching a low around 0.5610.  The Oct 2022 low around 0.5510 is in sight. Expect more rate cuts at the Feb RBNZ meeting, although if I am not mistaken RBNZ have previously said they are not confined to scheduled meetings to cut rates.  Perhaps they’ll act before Feb.   

AUD failed to make significant gains against NZD, the pair traded up to 1.1075 but after the NZD data and a higher than forecast Aussie inflation expectation number overnight, RBA still on hold and RBNZ on track to cut rates further I’d have thought it the pair could break higher.  Currently 1.1055, AUD weakness is more pronounced against GBP with GBPAUD now 2.0225, while AUDUSD dipped below 0.6200, now 0.6245.

Arsenal,  Newcastle and Liverpool all made it through to the semi-final of the league cup, the remaining place in the last four will be decided tonight as Spurs take on Man Utd.  Putting Spurs recent victory over a fairly poor Southampton to one side, I find it very difficult to be confident that Spurs have any chance in this match

Next up in BoE who are widely expected to keep rates on hold at 4.75%.  Dhingra, always dovish, is expected to be the only member to vote for a rate cut.  It will be interesting to see if anyone else follows suit, but 8-1 is the expected vote.  Even if Dhingra changes her view and votes for no change it is unlikely to cause any significant moves.  BoEs Bailey has previously suggested we could see a full 1% rate cut through 2025, we’ll be watching for any confirmation of whether this is still a likely scenario. 

After the BoE we will have US GDP along with some other reasonably key US data.  Early tomorrow morning we’ll have UK retail sales and then more US data including the core PCE deflator, one of the Feds favourite indicators. I’m still looking forward to winding down but we can’t quite do this just yet. 

Have a great day

-  12.00 BoE rate announcement

-  13.30 US GDP, PCE, philly fed survey, initial jobless claims

-  21.45 NZ trade balance

-  23.30 Japan CPI

-  01.15 PBoC rate announcement

-  07.00 UK retail sales