Introduction: Pound rallies on hopes of more dovish Fed

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

After a rough year against the US dollar, the pound is ending 2022 with a late spurt.

Sterling has hit $1.21 this morning, for the first time since mid-August, lifted by hopes that America’s central bank might slow the pace of its interest rate rises soon.

The pound has now clawed back almost 20 cents since hitting its record low in September after the mayhem caused by the now-ditched mini-budget.

It has strengthened today, on the news that a “substantial majority” of Federal Reserve officials want to slow the pace of interest rate rises soon.

A stronger pound could help cool the UK’s inflation crisis, as it’ll make imported goods like fuel and energy less expensive – although sterling is still down 10% against the dollar this year.

The pound vs the US dollar over the last year
The pound vs the US dollar over the last year Photograph: Refinitiv

Minutes from the Fed’s November meeting, where it hiked its benchmark rate by 75-basis points for the fourth time in a row, suggest that many officials could push for a smaller rise of 0.5 percentage points in December.

The Fed has already raised their target rate to to 3.75%-4%, up from 0%-0.25% at he start of the year, as it tried to stamp out elevated inflation. Consumer price inflation has now slowed, and is expected to keep dropping.

So with the global economy weakening, officials are wondering whether they can be less aggressive now.

As the minutes put it:

“A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability.

Government bonds have also strengthened in recent weeks, as the tough spending cuts and tax rises outlined by chancellor Jeremy Hunt reassured the markets.

Sterling and gilts build head of steam – pound hits highest since August vs $ and 3-week high vs euro; 10 and 30-year gilt yields slide to lowest since early Sept pic.twitter.com/1WLXbx1WiB

— Mike Dolan (@reutersMikeD) November 23, 2022

The Bank of England is expected to raise its own interest rates by another 50 basis points in December too, from 3% to 3.5%.

And a surge in people quitting the British workforce because of ill health or early retirement could force the BoE to further increase interest rates.

Chief economist Huw Pill warned last night that the departure of more than half a million workers from the jobs market since the Covid pandemic risked stoking inflationary pressures, long after the shock from sky-high energy prices is likely to fade.

But with the UK falling into recession, it may be hard for the pound to climb much higher.

Marios Hadjikyriacos, senior investment analyst at XM, says:

The latest business surveys suggest the UK economy is already in recession, on pace to contract 0.4% this quarter, which will likely deepen further considering the sharp drop in forward-looking indicators such as new orders.

With the economy rolling over just as the government tightens its belt, it’s difficult to be optimistic on the pound, especially considering its close links to global risk sentiment.

The UK central bank may move the pound later, as it holds its Bank of England Watchers’ Conference. Deputy governor Dave Ramsden, chief economist Huw Pill and external MPC maker Catherine Mann are all due to speak.

We also get the latest healthcheck on UK factories, and Germany’s business climate, plus results from DIY chain Kingfisher.

The agenda

  • 9am GMT: German IFO business climate index for November

  • 9.30am GMT: Latest weekly UK economic activity and social change data

  • 9.45am GMT: BoE deputy governor Dave Ramsden speaks at the Bank of England Watchers’ Conference

  • 11am GMT: CBI industrial trends for November

  • 12.30pm GMT: ECB monetary policy meeting accounts

Key events

Filters BETA

A man adjusting a radiator thermostat valve.
Photograph: fotorauschen/Alamy

Home improvement retailer Kingfisher has seen a surge in demand for energy efficient products, as households try to curb their use of gas and electricity.

CEO Thierry Garnier told the City:

While the market backdrop remains challenging, DIY sales continue to be supported by new industry trends such as more working from home and a clear step-up in customer investment in energy saving and efficiency. DIFM and trade activity also continues to be well supported by robust pipelines for home improvement work.

Kingfisher, which owns the B&Q, Screwfix, TradePoint and Castorama Poland chains, grew like-for-like sales by 0.2% in the last quarter, putting them 15% higher than before the pandemic.

Cost of supporting households with energy bills to jump

The price that the UK government will have to pay to support households with their energy bills is set to increase from January.

Regulator Ofgem has lifted its energy price cap, which would have meant households faced average bills of £4,279 from the start of 2023, up from £3,549.

However, the government’s support package means average bills will be £2,500 from last month, and rise to £3,000 from April (although there is no cap on the actual bill you could pay).

Here’s the full story:

Weak data = good news for markets.

Markets rallied over the last 24 hours, due to weak economic data and the latest Federal Reserve minutes.

Investors are dialling back the amount of rate hikes they’re expecting from the Fed over the months ahead, which is good for risk assets – and lifting the pound.

As Jim Reid of Deutsche Bank explains, bad news is good news (even if that bad news includes a likely recession).

It may seem paradoxical that weak data is being treated as good news by markets, but in large part it’s because the focus is now so heavily on above-target inflation, which has prompted the most aggressive cycle of rate hikes in decades. So signs of slower growth are seen as bringing fewer inflation pressures and hence fewer rate hikes.

On top of that, since a US and Eurozone recession is now the consensus expectation among economists (and leading indicators are increasingly pointing that way too), contractionary data isn’t as likely to be as surprising to markets as it normally is.

The weaker dollar is also pushing up commodity prices, including gold.

The gold price has risen to $1,755 per ounce, towards the three-month highs set earlier this month.

Tai Wong, a senior trader at Heraeus Precious Metals in New York, says last night’s minutes from the Federal Reserve had cheered markets:

“Gold traded higher in a relief rally after the Fed minutes contained no hawkish surprises, and just about confirmed the pace of hikes would drop to 50 bps in December.

“The financial markets are convinced the Fed is overtightening so it is dovishly interpreting the minutes which contains no real surprises given Fed commentary the past two weeks.”

Introduction: Pound rallies on hopes of more dovish Fed

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

After a rough year against the US dollar, the pound is ending 2022 with a late spurt.

Sterling has hit $1.21 this morning, for the first time since mid-August, lifted by hopes that America’s central bank might slow the pace of its interest rate rises soon.

The pound has now clawed back almost 20 cents since hitting its record low in September after the mayhem caused by the now-ditched mini-budget.

It has strengthened today, on the news that a “substantial majority” of Federal Reserve officials want to slow the pace of interest rate rises soon.

A stronger pound could help cool the UK’s inflation crisis, as it’ll make imported goods like fuel and energy less expensive – although sterling is still down 10% against the dollar this year.

The pound vs the US dollar over the last year
The pound vs the US dollar over the last year Photograph: Refinitiv

Minutes from the Fed’s November meeting, where it hiked its benchmark rate by 75-basis points for the fourth time in a row, suggest that many officials could push for a smaller rise of 0.5 percentage points in December.

The Fed has already raised their target rate to to 3.75%-4%, up from 0%-0.25% at he start of the year, as it tried to stamp out elevated inflation. Consumer price inflation has now slowed, and is expected to keep dropping.

So with the global economy weakening, officials are wondering whether they can be less aggressive now.

As the minutes put it:

“A slower pace in these circumstances would better allow the committee to assess progress toward its goals of maximum employment and price stability.

Government bonds have also strengthened in recent weeks, as the tough spending cuts and tax rises outlined by chancellor Jeremy Hunt reassured the markets.

Sterling and gilts build head of steam – pound hits highest since August vs $ and 3-week high vs euro; 10 and 30-year gilt yields slide to lowest since early Sept pic.twitter.com/1WLXbx1WiB

— Mike Dolan (@reutersMikeD) November 23, 2022

The Bank of England is expected to raise its own interest rates by another 50 basis points in December too, from 3% to 3.5%.

And a surge in people quitting the British workforce because of ill health or early retirement could force the BoE to further increase interest rates.

Chief economist Huw Pill warned last night that the departure of more than half a million workers from the jobs market since the Covid pandemic risked stoking inflationary pressures, long after the shock from sky-high energy prices is likely to fade.

But with the UK falling into recession, it may be hard for the pound to climb much higher.

Marios Hadjikyriacos, senior investment analyst at XM, says:

The latest business surveys suggest the UK economy is already in recession, on pace to contract 0.4% this quarter, which will likely deepen further considering the sharp drop in forward-looking indicators such as new orders.

With the economy rolling over just as the government tightens its belt, it’s difficult to be optimistic on the pound, especially considering its close links to global risk sentiment.

The UK central bank may move the pound later, as it holds its Bank of England Watchers’ Conference. Deputy governor Dave Ramsden, chief economist Huw Pill and external MPC maker Catherine Mann are all due to speak.

We also get the latest healthcheck on UK factories, and Germany’s business climate, plus results from DIY chain Kingfisher.

The agenda

  • 9am GMT: German IFO business climate index for November

  • 9.30am GMT: Latest weekly UK economic activity and social change data

  • 9.45am GMT: BoE deputy governor Dave Ramsden speaks at the Bank of England Watchers’ Conference

  • 11am GMT: CBI industrial trends for November

  • 12.30pm GMT: ECB monetary policy meeting accounts

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