Markets

Sterling isn’t having his best day. Cable hit its lowest level since March 2020 at 1.2064 and thoroughly tests final support (1.2081; 76% retracement on 2020/2021 rally) ahead of March 2020 low at 1.1412. EUR/GBP rebounds from 0.8578 at open to 0.8650 currently (testing the September 2021 high at 0.8658). The pair finally manages to clear the tough resistance zone around the big figure of 0.86. EUR/GBP 0.8699/0.8721 (38% retracement on the 2020/2022 decline; April 2021 high) lines up as the next upper hurdle. The perfect storm for the British currency has been brewing for some time now. The cost of living crisis is a global problem, but UK households were among the first to be heavily exposed, for example by lifting the ceiling on energy prices in April. More of the same will follow in October. The UK labor market report this morning was strong, but the media focused on the sharp drop in real wages. Wages in the UK rose 4.1% year-on-year in April, with CPI inflation of 9% year-on-year. The biggest drop in real disposable income on record (since 2001) does not bode well for the UK economic outlook. A second element at play for sterling weakness is that falling real wages complicates the picture for the Bank of England. Especially since Governor Bailey and co are an outlier when it comes to their purpose. Especially at the Fed, but now also at the ECB, tackling inflation and re-anchoring prime inflation expectations even if it comes at an economic cost. The Bank of England is more balanced and does not want to do too much in terms of political normalization so as not to stifle the economy. This can be seen in the current outperformance of UK gilts versus, for example, German Bunds. We agree that the BoE is already further along in its rate hike cycle, but relative momentum will start to play into the GBP’s disadvantage going forward. Even if the BoE carries out its fifth consecutive rate hike on Thursday and even if sterling money markets are pricing in a key rate peak of 3.25% early next year. The latest accident in the making the UK Government’s solo approach when it comes to overriding parts of the Northern Ireland Protocol of the withdrawal agreement. The government published a bill yesterday containing four unilateral proposals to override the Protocol. The publication of the bill (which still needs to be approved in both the lower house and the upper house) was immediately met with fury in Brussels, with the European Commission revamping legal action against the UK. Government plans elsewhere not only infuriates the EU, but also some of Johnson’s Conservatives and the election-winning Irish Republicans of Sinn Fein in Northern Ireland. In other markets we have seen some consolidation: the dollar is a little weaker, equities are trying to regain ground (but lack strength) while the Bund and the future Note are stuck near the lows of the sale.

News headlines

Swedish inflation reached 7.3% year-on-year in May. It’s the highest reading in 31 years and was a sharp increase from the 6.4% seen in April. Monthly momentum was 1%. The CPIF, the Riksbank’s preferred inflation indicator using a fixed interest rate, rose from 6.4% to 7.2% year-on-year, with all but one category posting monthly price gains (strong ). Both measures surprised on the upside (7%). Excluding energy, the core CPIF rose from 4.5% to 5.4%. Today’s numbers increase the odds of the Riksbank rising by moves larger than the inaugural 25 basis points in April. Markets consider such a decision to be at least done for the June 30 meeting (50 basis points), but that was the case even before the inflation release. EUR/SEK briefly dipped (SEK strengthened) to 10.52 before immediately paring gains. The currency pair is currently changing hands around 10.63.

OPEC expects significantly weaker growth in oil demand next year as inflation and (geopolitical) conflict will grip the global economy. According to preliminary projections, oil consumption would increase by 1.8 million barrels per day, against 3.4 million forecast for this year. To meet that demand while making up for lost (Russian) production, the oil cartel earlier this month announced a faster-than-expected removal of pandemic-era production restrictions in July and August. Oil prices have continued to rise, and today is no exception. Brent gained more than 2% to $124.4/bbl.