UK PMIs on the menu but political difficulties reemerge – Preview

Nov 21, 2023 at 8:52 am GMT- Achilleas Georgolopoulos

• PMI survey prints will be released on Thursday amidst volatile political environment

• Wednesday’s Autumn statement is key as another government crisis could unfold soon

• Pound does not enjoy the increased domestic risks, especially as BoE remains dovish

 Inflation dropping but so is growth

Bank of England Governor Bailey got his wish in last week’s inflation report for October. The annual inflation growth rate dropped to a respectable 4.6% from 6.7% in the previous month, and miles away from the November 2022 high of 11.1%. The inflation rate remains elevated, but it is now much closer to levels seen in other developed nations, thus reducing the pressure on the BoE to raise rates again.

The main reason for this inflation slowdown is the considerably lower energy prices recorded this year compared to 2022. However, there is also an element of lower growth seen across the board. Despite GDP growth remaining positive in the third quarter of 2023, industrial and manufacturing data have been mixed and the PMI surveys are stuck in contraction territory.

November PMIs on Thursday

More specifically, the manufacturing PMI survey has remained below the 50-threshold since July 2022, which indicates a significant momentum loss in the sector. In the meantime, the much-talked about Services PMI has recently dipped into contraction territory. On Thursday, the preliminary prints of these two PMI surveys for November will be released. The market expects marginal changes in both sub-indices.

This will probably be music to the ears of certain BoE members as domestically driven services price inflation continues to haunt their dreams. To be fair, the BoE has always been trying to engineer a slowdown in the economy to regain control of the runaway inflation, and they now seem to be achieving their target. However, inflation clearly remains above their price stability remit, making it the main topic of discussion at Tuesday’s parliamentary appearance.

Political developments and the Autumn Statement

The government though does not seem to share the same feeling regarding the growth outlook. Wednesday’s Autumn Statement is expected to include a series of tax breaks with Chancellor Hunt possibly announcing lower income taxes and/or an inheritance tax cut. In addition, stronger tax receipts and new rules for pension funds could allow the incumbent government to spur public investments, especially in underdeveloped areas.

The Autumn Statement comes at a period when the government under PM Sunak appears to be under pressure. The recent cabinet reshuffle and particularly the removal of the Interior Minister have caused unrest in the Conservative Party. It is worth noting that the next general elections are scheduled to be held before January 28, 2025 which means that, most likely, during the fourth quarter of 2024 we will have elections in both the UK and US.

The UK has already experienced three different PMs since the 2019 elections. With the polls showing the Labour Party clearly in the lead, we cannot exclude the possibility of a fourth PM selected from the current legislature to lead the Conservative Party in the next election battle. Obviously, this unrest is not instilling much confidence both domestically and internationally, especially in a period when the UK has been trying to attract foreign investment -hence, the clear pro-growth direction expected by the Autumn statement.

Pound trying to react to the euro rally

The pound has been under pressure against the euro since the August low. Despite the negative newsflow from the euro area, the market has turned against the pound due to the weakening growth prospects of the UK economy and the recent political shenanigans, especially as the next elections could bring the less market-friendly Labour Party in power.

This week’s events and data calendar could cause an increase in volatility for the euro-pound pair especially if PMI survey figures surprise on the upside, the Autumn statement is more pro-growth than currently foreseen, and the BoE's rhetoric becomes a tad more hawkish. The combination of these three outcomes could allow pound bulls to break the August 23, 2023 ascending trendline and open the door for a more protracted move below the 0.8622 area.

On the flip side, a plethora of growth negative prints and dovish BoE commentary could result in another upleg in euro-pound with the 0.8794-0.8815 area potentially being the primary target for euro bulls.