Currency Market Update - 21st June 2023

Currency Market Update UK Core Inflation figures were forecasted to remain unchanged at 6.8% but came out 0.3% higher. MoM inflation also released 0.3% higher to previous levels.

Despite inflation consecutively falling over the last quarter from 10.4% in February, 10.1% in March, 8.7% in April (lowest since March 2022), this is the second month in a row where inflation figures have released above expectation and would strongly suggest that the BoE may have to more hawkish in the second half of the year.

The 0.3% increase in Core CPI now implies that interest rates will need to rise to at least 6%, which would cause additional pressure to home-owners and the onset of a UK recession now seems closer.

Even though the economic outlook for the UK seems positive with increased consumer confidence and falling energy prices, the latest retail sales figures have recorded a decline in activity and unemployment is also up by 0.1% to 3.9%. UK GDP is also 0.5% lower than pre-pandemic levels, compare this to the Euro zone, which has 2.2% higher GDP than pre-pandemic.

With Europe now firmly in recession, it seems inevitable that the UK could fall into recession in the coming months, primarily because inflation is not falling off quick enough.

USA Mortgage Rates & Applications are due out, with no forecast on offer. The Federal Reserve’s decision to raise rates seems to have clearly worked as application rates have been falling consecutively in the last few months, with March registering a 28-year low reading.

With demand now suppressed, the downside is that 30-year mortgage rates now sit at 6.8% compared to 1 year ago at 3.2%. An average 300K USD mortgage will now cost 50% more in monthly payments.

Over in Canada, the New Housing Price Index has recorded a steep YoY decline from 8.4% to -0.2% recently. The housing market crisis is near boiling point as there is a big shortage of housing stock and the Canada Housing and Mortgage Corporation reported the need to build 5.8million new homes by 2030, which is a challenging feat given the population has grown by more than 1 million people in the last 12 months alone. Unsurprisingly, a 2-year ownership ban on foreign nationals has been put into place given that 96% of the increase in population has been from non-Canadian nationals.

MoM Retail Sales figures for Canada are also out today for April, with forecast of 1.6% improvement from previous. March saw sales drop by 1.4% due to a decrease in motor vehicle and part sales, as well as clear drops in gas and fuel sales. In contrast to Core Retail Sales (exc. gas and fuel sales) have seen 0.3% increase - a 4th consecutive growth, due to higher sales in building materials and garden equipment and supplies, which could be due to warmer weather.

In the afternoon, the Fed Chair Jerome Powell has his testimony. The key talking point will be the discount rate, which is now paused at 5.25%. The latest interest rate pause comes off the back of 15 months of consecutive rate hikes intended to tackle a 40 year-high inflation, by slowing down the economy and cooling demand. From an economics standpoint it seems to have worked, but now the Fed needs to assess the impact to consumers and home-owners who face steeper living costs and tighter financial conditions.



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