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Toxic cocktail darkens outlook for British pound

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The Bank of England has raised UK borrowing costs four times this year to fight inflation
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A toxic cocktail of sluggish growth and high inflation, plus Brexit and fallout from the coronavirus pandemic, is set to weigh on the pound in the coming months, economists warned.

Since the start of the year, sterling has fallen by more than seven percent against the dollar, which is benefiting from rises in US interest rates.

The pound has also fallen by 1.7 percent against the euro since the beginning of 2022.

This comes despite the Bank of England having raised UK borrowing costs four times this year to fight inflation.

By contrast, the European Central Bank is waiting until July to raise its key interest rates for the first time in more than a decade.

BoE rate rises have “been insufficient to offset the headwinds weighing on the pound”, said Rabobank analyst Jane Foley. 

“Concerns about growth have been central to the poor performance of the pound,” she said.

Fears of recession in the UK and elsewhere are gaining momentum as soaring inflation — fuelled by rocketing energy prices — hits investment and consumer spending.

Oil and gas demand has surged as economies emerge from pandemic lockdowns, while supplies have been hit by the invasion of Ukraine by major producer Russia. 

Britain’s annual inflation rate stands at nine percent, a 40-year high, while the Bank of England is forecasting the UK economy to contract at the end of the year. 

The Bank of England’s next rate decision is due June 16 when it is expected to take its main borrowing cost above one percent.

“Hiking rates against a sharply slowing economy is never a good look for any currency,” said Bank of America currency strategist, Kamal Sharma.

– Brexit cost –

The pound has dropped to around $1.25 compared with $1.40 before the 2016 vote in favour of Brexit, or Britain’s departure from the European Union.

After the UK entered its first pandemic lockdown in March 2020, sterling sank to $1.14, the lowest level since 1985.

And the pound took a knock this week after embattled British Prime Minister Boris Johnson faced a vote of no confidence from his own Conservative MPs. 

Although Johnson survived, 41 percent of those who voted failed to back him as their leader.

Another big factor affecting the pound is that the BoE “remains wholly unwilling to discuss” the full consequences of Brexit on the UK economy, according to Sharma.

This could partly be due to the fact that it is difficult to pin down the exact financial fallout, with Britain’s departure from the European Union formalised only during the economic shock caused by the Covid-19 pandemic.

Meanwhile, political paralysis in Northern Ireland, a direct consequence of Brexit, poses further problems for the pound, according to economists.

“The added risk is that there is another Brexit bust-up, perhaps over the Northern Ireland Protocol,” Capital Economics analyst Paul Dales told AFP. 

“The latter could result in the pound weakening below $1.22.” 

The protocol was agreed upon as part of Britain’s Brexit divorce deal with Brussels, recognising Northern Ireland’s status as a fragile, post-conflict territory that shares the UK’s new land border with the EU.

But Britain is readying new legislation to rewrite its Brexit commitments to fix trade distortions in the province.

Sharma expressed concern “that the increasing politicisation of UK policy undermines the pound”.

Whatever the financial cost of Brexit, “underpinning the market’s concerns about growth was the recent IMF (International Monetary Fund) projection that the UK is set to have the slowest pace of growth in the G7” group of rich nations next year, said Foley.

Other global financial bodies, such as the Paris-based Organisation for Economic Co-operation and Development (OECD), have also slashed their growth outlooks for Britain, as well as for other major economies.

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Asian markets track global sell-off on inflation, rate fears

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US consumer price data later in the day will be closely watched for an idea about the Federal Reserve's plans for monetary policy
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Asia extended losses across world markets on Friday after the European Central Bank laid the groundwork to join others in a programme of interest rate hikes, while attention turns to the release of key US inflation data.

After a largely positive start to the week, investors tracked their US and European colleagues in selling up as they contemplate higher borrowing costs and surging prices, which many fear could lead to a recession.

Adding to the unease was news that officials in China had once again locked down millions of people to test them owing to another flare-up in cases, dealing a blow to hopes for an economic reopening.

Still, the move helped push down oil prices — a key driver of global inflation — owing to concerns about the impact on demand.

With prices rising at a decades-high pace, central banks have been forced to withdraw the vast financial support measures put in place to combat the impact of the pandemic and helped fuel a rally across markets to record or multi-year highs.

The ECB became the latest to join the tightening campaign, announcing Thursday the end of its bond-buying programme and signalling it will hike rates several times this year.

It also sharply upgraded its inflation forecasts for this year and next while lowering the economic growth outlook.

Focus now turns to the release of US consumer price figures later Friday, with a strong reading likely to give the Federal Reserve more room to be aggressive.

“A robust May… print will probably prompt (policymakers) to hint at a 50 basis point hike for the September meeting,” said SPI Asset Management’s Stephen Innes.

“The tone will remain hawkish and the tough talk on inflation will continue.”

However, he added that “the significant upward revisions to core inflation projections are close to ending. Risk markets could take solace if one or two participants shift to seeing the inflation outlook is more balanced”.

Expectations are that the Fed will hike by half a point for at least three more meetings before January. 

Other commentators also suggested that traders were looking for signs inflation may be close to its highs.

“The big question is whether inflation has peaked or not,” said Matthew Simpson of StoneX Financial. 

“Inflation may have softened to a degree in April, but traders really want to see further evidence that inflation is pointing lower to call ‘peak inflation’ with confidence.

“Besides, one single month of data doesn’t define a trend.”

And OANDA’s Edward Moya said that the darkening outlook could provide an argument for the Fed to apply the brakes to hiking later in the year.

“Warning signs about the economy are emerging as weekly jobless claims are starting to rise, China’s Covid situation will prove troublesome for supply chains over the next couple of quarters, and as inflationary pressures broaden and show no sign of easing.

“It seems reductions in global growth forecasts will become a steady theme over the next few months and that should complicate how much more tightening we see from central banks.”

In early trade, Tokyo, Hong Kong, Sydney, Seoul, Singapore, Taipei, Wellington, Manila and Jakarta were all down.

However, data showing Chinese producer price inflation eased last month to its lowest level in a year provided some cheer to mainland traders with Shanghai edging up slightly.

On currency markets the euro continued to struggle against the dollar after the ECB flagged a quarter-point hike, while the yen remained around two-decade lows on the greenback.

– Key figures at around 0230 GMT –

Tokyo – Nikkei 225: DOWN 1.4 percent at 27,848.79 (break)

Hong Kong – Hang Seng Index: DOWN 0.7 percent at 21,726.41

Shanghai – Composite: UP 0.3 percent at 3,248.75

Euro/dollar: UP at $1.0626 from $1.0620 late Thursday

Euro/pound: UP at 85.05 pence from 84.98 pence

Dollar/yen: DOWN at 134.03 yen from 134.40 yen

Pound/dollar: DOWN at $1.2493 from $1.2495

Brent North Sea crude: DOWN 0.8 percent at $122.10 per barrel

West Texas Intermediate: DOWN 0.8 percent at $120.60 per barrel

New York – Dow: DOWN 1.9 percent at 32,272.79 (close)

London – FTSE 100: DOWN 1.5 percent at 7,476.21 (close)

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US consumers unlikely to get respite from inflation in May

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US gasoline prices are hitting new records daily amid a surge in inflation worldwide
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The torrid pace of US inflation may have eased slightly in May, but prices have remained high to the detriment of Americans’ wallets, sending President Joe Biden and the Federal Reserve racing to help.

Consumer prices in the world’s largest economy have soared by the fastest pace in more than four decades, with gas prices at the pump hitting new records daily amid the fallout from Russia’s invasion of Ukraine as well as ongoing supply chain challenges due to the Covid-19 pandemic.

Biden, whose popularity has taken a hit as prices surge, has made fighting inflation his top domestic priority, but is finding he has few tools to directly impact prices.

“Inflation is the bane of our existence,” Biden acknowledged in an interview Wednesday with late-night television host Jimmy Kimmel.

The Labor Department is set to release the May consumer price index (CPI) data on Friday, which analysts expect will show a slightly higher monthly increase than in the prior month, but potentially saw a modest slowdown in the torrid annual pace.

US consumer prices jumped 8.3 percent in the 12 months ending in April, and though economists say the rate probably peaked in March at 8.5 percent, it is likely to remain high for months to come, something the White House has acknowledged.

“We estimate the 12-month change in overall CPI eased only slightly” to 8.2 percent, said Rubeela Farooqi of High Frequency Economics.

Sam Stovall of CFRA expects the rate slow to 8.1 percent but warned further declines are likely to be “glacial.”

However, a consensus forecast sees the rate holding steady at the 8.3 percent the pace seen April.

Biden has tried to hammer home his optimistic message about the economic progress in the wake of the pandemic, including rapid GDP growth and record job creation, while pressing Congress to take action to lower costs on specific products, and go after firms such as shipping companies that are taking advantage of limited competition to impose steep price hikes.

“We have the fastest-growing economy in the world,” he said. “That’s allowed us at least to stay on top of and a little bit ahead of what’s happening around the world.”

– Inflation remains ‘elevated’ –

The United States has come roaring back from the economic damage inflicted by the Covid-19 pandemic, helped by bargain borrowing costs and massive government stimulus measures.

But with the pandemic still gripping other parts of the world, global supply chain snarls have caused demand to far outstrip resources. Meanwhile, the conflict in Ukraine has sent global oil prices above $100 a barrel.

The Federal Reserve has begun raising interest rates aggressively, with another big hike expected next week, as policymakers attempt to combat inflationary pressures without triggering a recession.

The White House acknowledged inflation is likely to remain “elevated” in May, though Press Secretary Karine Jean-Pierre said Wednesday the administration continues “to believe the economy can transition from what has been a historic recovery… to stable steady growth.”

In a video posted on Twitter on Thursday, Biden urged Congress to pass a bill aimed at easing the cost of shipping containers to US ports, which in turn would bring down prices.

The bill passed the Senate in March, and the House of Representatives is set to vote on the legislation next week.

Another step Washington could take is to lift some of the punitive tariffs Biden’s predecessor Donald Trump imposed on China, which supporters argue would help ease price pressures by making imports cheaper.

Treasury Secretary Janet Yellen told lawmakers Wednesday that such a move was under “active consideration” and the administration would provide more information in “in coming weeks.”

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Grammys add new categories including best video game score

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The Grammy Awards will feature some new categories in 2023
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The 2023 Grammy Awards will feature new honors including for the year’s best video game soundtrack and Songwriter of the Year, the Recording Academy said Thursday.

In the year’s most significant change, the Songwriter of the Year prize will not be open to performing or producing artists, but rather focus on working songwriters who often receive little recognition for their contributions, and have lobbied for years for such a tweak to the prestigious music awards.

Artists will also be able to submit their work for Best Alternative Music Performance, Best Americana Performance and Best Spoken Word Poetry Album, a field that will now be separate from the always eccentric audiobook category.

The Recording Academy will also give out a special merit award, chosen by a designated committee, for Best Song For Social Change, which seeks to celebrate tracks that “contain lyrical content that addresses a timely social issue and promotes understanding, peacebuilding and empathy.”

The changes follow several years of Grammy category reworks as the academy attempts to quell criticism that its award picks are not inclusive and don’t reflect evolutions in the music industry.

“We’re so excited to honor these diverse communities of music creators through the newly established awards and amendments, and to continue cultivating an environment that inspires change, progress and collaboration,” said Harvey Mason Jr., the academy’s CEO, in a statement.

In 2020, the Los Angeles-based institution made a number of category name swaps, including changing the controversial “urban contemporary” to “progressive R&B.”

The move came amid growing concern in the music industry that “urban” was far too general to encompass the genres including hip-hop and R&B that it came to describe, and belittled the innovations of Black musicians.

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