Last week, economic data for the UK presents a contrast, as headline inflation remains steady at 6.7%, defying expectations of a modest decrease. Meanwhile, wage growth has marginally slowed to 8.1% (including bonuses), offering some initial relief from the cost-of-living pressures.
Forecasts indicate a sharp drop in inflation in October, driven by reduced domestic energy costs. Simultaneously, the tightening labour market's grip is beginning to loosen. These factors reinforce the belief that the Bank of England has likely reached the peak of interest rates and is likely to maintain the current rates well into 2024. The latter half of next year is when interest rate cuts are anticipated as the focus shifts from combating inflation to stimulating economic growth.
In contrast, the US economy continues to exhibit strong performance, supported by better-than-expected retail sales data this week. This performance keeps the possibility of another rate hike by the Federal Reserve very real, as Treasury yields continue to rise. However, on account of a weakening economic outlook, aggressive rate cuts are now being factored in for the second half of 2024. The upcoming elections in the UK and US in the next year will add to the uncertainty and challenges faced by investors.
Looking ahead, the European Central Bank is scheduled to meet next week, but no changes in rates are expected, as they too are believed to have reached their peak rates. Forecasters predict that aggressive rate cuts are likely in the latter part of the following year.
Geopolitical tensions in the Middle East persist, contributing to a risk-averse sentiment in the market. Ongoing fears of an escalation in these tensions are keeping oil prices elevated and further fuelling inflationary pressures.
On the foreign exchange markets, the strength of the US dollar continues to gain momentum due to the country's economic outperformance and safe-haven investments. The GBP/USD pair remains volatile, trading above the critical 1.2000 level, while the GBP/EUR pair is at a 5-month low, trading below the pivotal 1.1500 level.
