Hunts Challenges and Inflation Pushback.

GBP: Inflation Pushes Back, Chancellor Acknowledges Challenges

Headline inflation in the UK is now comparable to September 2021 levels, challenging recent claims that UK inflation is more assertive than that of developed counterparts like the euro area and the US. The Office for National Statistics attributes the decline to transport, recreation, culture, and food. Chancellor Hunt acknowledged the ongoing inflation challenge, cautioning that it doesn’t decrease in a straight line. Despite his statement, market focus remains on the data, with a dovish repricing of Bank of England rate paths anticipating cuts of around 116bps by December 2024, starting as early as May 2024.

USD: Dollar Softens as Fed Signals Easing Path

The US dollar, measured by the DXY index, softened by 0.35% to 102.13, influenced by declining Treasury yields following the Federal Reserve’s recent pivot. The Fed’s optimistic stance on inflation, hinting at potential rate cuts, contrasts with its previous position. Market confidence in the Fed prioritizing economic growth over price stability is likely to lead to lower bond yields and pose a challenge for the greenback. FOMC’s dovish posture is boosting riskier currencies, and the DXY index could see new lows before the end of 2023.

EUR: EU Ministers Reach Fiscal Deal with Stricter Rules

EU economy and finance ministers have agreed on new fiscal rules for the EU, imposing stricter overall spending limits. While maintaining the 3% GDP deficit and 60% debt to GDP thresholds, the rules allow leeway for investments in defense and the green transition. Countries with debt exceeding 90% of GDP must reduce it by 1% annually, and those between 60% and 90% must make half that effort. Enforcement is tougher, requiring countries deviating from spending plans to cut by 0.5% of GDP yearly. A last-minute concession exempts interest payments from calculations in 2025-27 for countries like France. With 16 out of 27 EU countries expected to breach targets, an overall tighter fiscal stance is anticipated in 2024, affecting spending plans in larger countries like France, Italy, and Belgium.