Yesterday was mixed for sterling, with small falls against the euro and yen but strong rises against the Australian, Canadian and US dollars – close to two-thirds of a cent against AUD.
The biggest story of the week has been waning confidence from British business and consumers, with PMI (the Purchasing Managers’ Index) dropping further than expected (while Europe’s rose). Consumer confidence in the UK has also worsened to its lowest this year. Consumer insights director, at GfK said: “As the budget statement looms, consumers are in a despondent mood despite a fall in the headline rate of inflation.”
This all bolsters the case for interest rate cuts from the Bank of England in two weeks, which would hit sterling exchange rates. However, while a rate cut on 7 November is essentially priced in to sterling now, it may not be a done deal. One of the BoE’s most hawkish rate setters, Catherine Mann, is still undecided, saying that there is still a long way to go before inflation is driven back to 2% over the medium term. The BoE’s governor Andrew Bailey was also cautious, saying: “Disinflation is happening, I think, faster than we expected, but we still have genuine questions about whether there have been structural changes in the economy.”
Services PMI in the UK (the most influential sector) dropped from 52.4 last month to 51.8 in October, below expectations. Germany’s services PMI, on the other hand, rose from 50.6 to 51.4. These may seem like small differences but the markets will also be looking at the direction of travel. Germany’s manufacturing sector – its most important – also improved markedly from 40.6 to 42.6 (although anything below 50 still shows the sector contracting overall). US services PMI is still rising high at 55.3, but as a report in the FT today shows, such surveys maybe should be taken with a pinch of salt as political bias makes a difference to people’s answers.
Elsewhere in the business news, there is plenty of speculation about the autumn Budget, now less than a week away. The government will be changing the rules on debt so that it can spend an extra £50bn on big infrastructure projects. The promise of extra spending will have been of benefit to GBP. Additional National Insurance payments by employers still appears to be on the agenda, along with inheritance and capital gains tax rises, as these do not constitute a tax on “working people” said the prime minister, which Labour had promised not to raise in the election campaign.
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