Fighter: 2 (Sterling Falls)

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Last week, the G-7 group of advanced economic nations announced plans to impose a price cap on Russian oil exports, and to restrict Russia’s ability to secure tankers and insurance from countries outside the G-7. Rival agency Fitch warns that leaving the EU could bring both short-term disruption and long-term risks for the UK. Money market pricing meanwhile shows investors are positioned for a further 50-75bp worth of hikes by the summer; more than the U.S. Federal Reserve and the majority of G10 central banks.

They fear that a vote to leave the EU could hurt investment in the UK, dampen exports and thereby hit overall economic growth. The ONS says its findings continue to show a divergence between quantities bought (volume) and the amount spent (value) in retail sales over time because of price increases. Finally, Von der Leyen proposed a cap on the price of Russian gas, saying it was necessary to cut revenues that “Putin uses to finance his atrocious war in Ukraine”. The chancellor and the governor agreed to re-instate weekly meetings – starting with bi-weekly meetings in the first instance - and coordinate closely to support the economy over the coming months.Huw Pill, the Bank’s chief economist, said the new prime minister Liz Truss’s expected freeze on household energy bills could lower inflation in the short term, relative to the central bank’s latest forecasts published in August (which had inflation peaking at just over 13% in the fourth quarter, and remaining at “very elevated levels” throughout next year). That peak is 85,000 higher than expected in March – when it was expected to be 4.4% -and come a year later than expected. Investors remain on hold ahead of Friday's economic data, including gross domestic product, the balance of trade and industrial production. This is partly because of a generally strong dollar, as the Bank of England governor Andrew Bailey noted this morning. The dollar hit a 24-year high against the Japanese yen today, and has been testing a 20-year high against the euro.

The Pound to Euro exchange rate is two-thirds of a per cent below Monday's peak and is quoted at 1.1489 at the time of writing, the Pound to Dollar exchange rate is meanwhile 1.40% below Monday's peak at 1.2252. Calling on Germany to return a turbine following repairs for the pipeline’s Portovaya compressor station that would allow Russia to resume gas supplies, Putin said: Due to the scale of the gas crisis, the government’s first priority will be to support families and businesses in the immediate term, according to the Treasury’s press release.The Pound could suffer a fall of approximately 0.60% should investors sense the Bank has delivered its final hike, according to TD Securities strategists. The UK currency looked set for another weekly decline against key peers after retail sales were reported to have fallen 2.4% in the year to October, down from -1.5% in September and below consensus expectations for -1.5%.

For the Pound, the numbers provide yet more evidence of a slowing economy that some economists don't believe will turn around until the second half of 2024. There’s more from Vladimir Putin. The Russian president has threatened to cut off energy supplies to the west if price caps are imposed on Russian oil and gas exports, saying that the west would be “frozen” like a wolf’s tail in a famous Russian fairy tale, Reuters reports. The market is nevertheless looking through Bailey's protestations, instead focussing on his comments that inflation is set to come in "quite a bit lower" in this month's inflation release from the ONS. Europe faces a winter fuel crisis and soaring energy bills after Gazprom suspended all gas supplies through Nord Stream 1, saying it had found an engine oil leak during maintenance work. The chancellor was clear this will mean “necessary higher borrowing in the short-term whilst ensuring monetary stability and fiscal discipline over the medium term”. He committed to “ensuring the economy grows faster than our debts and keeping debt as a proportion of our economy on a downward path”.

The Office for Budget Responsibility’s central forecast is that unemployment rises to 1.6 million people (4.6% of the labour force) and peaks in the second quarter of 2025. Nevertheless, upside surprises for the Pound could come from any economic growth upgrades, something that the Bank will have to deliver given the economy has outperformed the projections laid out in February. The US dollar is broadly higher following a lower-than-expected reading on Unemployment Claims. This has pushed EURUSD lower to 1.087 from a Tuesday high of 1.096. GBPUSD is also lower and showing relative weakness compared to other G7 currencies following the Chancellor’s budget statement. EURGBP is 0.15% higher at 0.8715. Sales were expected to rise by 0.3% month-on-month in October, recovering from September's downwardly revised -1.1%, but came in at -0.3%. But TD Securities holds a base case assumption (70% odds) that the Bank hikes 25bps and leaves guidance essentially unchanged.

Net-net on the implications for headline inflation in the short term, I would expect that to see a decline. There is also an impact on prices in the UK. The cost of anything that is imported rises when sterling falls. So if the fall in the pound persists, it could be reflected in pricier petrol and in a rise in the cost of some foods and electronic goods. British consumer spending grew at the slowest pace in more than a year last month, reflecting concerns about the cost of living in the run-up to Christmas, according to a survey released on Tuesday.Speaking at an economics forum in the Pacific city of Vladivostok, Putin said European calls for a price cap on Russian gas were “stupid” and would lead to higher global prices and economic problems in Europe. In a research note entitled “You ain’t seen nothing yet”, the bank comments: “The role of Brexit in steering recent pound price action can be likened to a rollercoaster warming up with some small twists and turns before an inevitable sharp drop.”