- PMI survey prints will be released on Thursday amid a volatile political environment
- Wednesday’s autumn statement is key as another government crisis could soon unfold
- The pound does not enjoy heightened domestic risks, especially as the BoE remains dovish
Inflation is falling, but so is growth
Bank of England Governor Bailey got his wish in last week’s inflation report for October. The year-on-year inflation rate fell to a respectable 4.6% from 6.7% the previous month, and miles away from the November 2022 peak of 11.1%. Inflation rates remain elevated but are now much closer to levels seen in other developed countries, reducing pressure on the BoE to raise rates again.
The main reason for this slowdown in inflation is the significantly lower energy prices recorded this year compared to 2022. However, an element of lower growth can also be seen across the board. Despite GDP growth remaining positive in the third quarter of 2023, industrial and manufacturing data is mixed and PMI surveys are stuck in contraction territory.
November PMI on Thursday
More specifically, the manufacturing PMI survey has remained below the 50 threshold since July 2022, indicating a significant loss of momentum in the sector. Meanwhile, the much-discussed services PMI has recently dipped into bearish territory. Advance prints of these two PMI surveys for November will be released on Thursday. The market expects marginal changes in both sub-indices.
That will likely be music to the ears of some BoE members as domestic service price inflation continues to haunt their dreams. To be fair, the BoE has always tried to slow down the economy to regain control of rampant inflation, and now they seem to be achieving their goal. However, inflation clearly remains above their competence in the area of price stability, which is why it is the main topic of discussion at Tuesday’s parliamentary appearance.
Political developments and autumn statements
However, the government does not seem to share the same sentiment about the growth outlook. Wednesday’s Autumn Statement is expected to include a range of tax relief, with Chancellor Hunt possibly announcing lower income taxes and/or cuts to inheritance tax. In addition, stronger tax revenues and new rules for pension funds could allow the current government to stimulate public investment, especially in underdeveloped areas.
The autumn statement comes at a time when Prime Minister Sunak’s government appears to be under pressure. Recent cabinet reshuffles and in particular the sacking of the Home Secretary have caused unrest in the Conservative Party. It’s worth noting that the next general election is due before 28 January 2025, which means we’ll most likely have elections in both the UK and the US during the fourth quarter of 2024.
Since the 2019 election, the UK has already seen three different Prime Ministers. With the polls showing the Labor Party clearly in the lead, we cannot rule out the possibility of a fourth Prime Minister drawn from the current legislature leading the Conservative Party into the next election battle. It is clear that this turmoil does not inspire much confidence both domestically and internationally, especially at a time when the UK is trying to attract foreign investment – the clear pro-growth direction that the Autumn Statement anticipates.
The pound struggles to respond to the euro’s recovery
Since the August low, the pound has been under pressure against the euro. Despite a negative flow of news from the Eurozone, the market turned against the pound on weakening UK economic growth prospects and recent political shenanigans, especially as the next election could bring a less market-friendly Labor Party to power.
This week’s events and data calendar could see Euro-Pound volatility increase, especially if the PMI survey surprises to the upside, the autumn statement is more pro-growth than currently expected and the BoE’s rhetoric gets a bit hawkish. The combination of these three results could allow the pound bulls to break the uptrend line on August 23, 2023, opening the door for a longer move below the 0.8622 area.
On the other hand, a slew of negative growth prints and dovish comments from the BoE could see the Euro-pound strengthen further, with the 0.8794-0.8815 area a primary target for Euro bulls.