While in the United States yesterday's retail sales data seemed to surprise positively, which could translate into a strengthening USD, the same data today from the UK contributed to a negative surprise. Thus, the fate of the British pound and the pace of interest rate hikes may be at stake.
The British pound was trading in the region of $1.38 on Friday morning, which appears to be the lowest level in over a week, after economic data showed that UK retail sales unexpectedly fell in August for the fourth consecutive month. On a m/m basis, the value of goods sold was 0.9 percent lower, compared to expectations of a 0.5 percent increase. Meanwhile, UK inflation rose more than expected to a near nine-year high, reigniting fears of faster-than-expected policy tightening by the Bank of England.
In the market, a UK interest rate hike from the current 0.1 percent to 0.5 percent is priced in for November 2022 against earlier estimates of a rise to that level in December 2022. The first hike of 0.15 pct is priced by the market for March 2022 and the next for May 2022. Meanwhile, Goldman Sachs economists expect the BOE to raise the interest rate by 15 bps in May and then raise it by 25 bps every two quarters. The monetary tightening cycle will bring the rate to 0.5 percent in the fourth quarter of 2022, to 0.75 percent in the second quarter of 2023 and to 1 percent in the fourth quarter of 2023. Goldman Sachs writes in its note that wage growth is strong and inflationary pressures are strengthening more than expected. In addition, comments from MPC members combined with the new appointment of a chief economist suggest the view of the majority of the committee that the minimum conditions for the start of monetary tightening have been met, GS reports cited by Bloomberg. Investors' attention thus shifts to next week's Bank of England meeting, where policymakers may give a signal on when the central bank will tighten its policy.
However, before the Bank of England's decision comes out next Thursday, the Fed's decision on interest rates and bond purchases will be announced on Wednesday. The latest FOMC macroeconomic projections will also be unveiled. Investors are scrutinizing the latest economic data and waiting for further details on when the Fed will begin tapering monetary stimulus and reducing its $120 billion per month asset purchase program. Recent economic data has shown a mixed scenario, with retail sales unexpectedly rising last month and inflation slowing but remaining elevated, which seems to raise questions about whether inflationary pressures are temporary as supply chain problems and commodity shortages persist. In addition, the latest labor market report disappointed and industrial production slowed. Next week's FOMC meeting and Chairman Powell's press conference will be in the spotlight as investors await the tapering schedule presentation.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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