10 June 2024: Sunak sorry for yet another gaffe


  • Immigration has made an ironic contribution to GDP since 2010
  • Employment is still “red-hot”
  • ECB rate cut to breathe life into the economy
GBP – Market Commentary

Labour’s “non-commitment” is working as poll lead grows

The Conservative Party has faced an uphill task to control immigration since it came to power, both before and after Brexit. Ironically, its abject failure to bring down the number of people coming to the country, both legally and illegally, has been the only reason the economy has grown during its fourteen years in power.

A report published last week suggested that growth since 2010 has been “lacklustre” and is mainly due to the rise in population levels due to immigration.

Both Labour and Tories have vowed to bring down immigration if they form the next government while saying little about how they will increase productivity through higher investment to stimulate real, long-term growth.

Conservative Peer, David Willets, the CEO of the Resolution Foundation which published the report believes that GDP growth per head is too low and we have got to boost investment to grow the economy. Party manifestos must recognise how serious the problem is and show how to tackle it.

The campaigns so far haven’t tackled this challenge.

Rishi Sunak was forced to apologise for leaving the D-Day anniversary commemorations early. His actions were criticized by MPs from all sides. This is another in a seeming catalogue of blunders which is constantly handing the initiative to the Opposition.

The prediction that all Labour will have to do to win the election is avoid any “banana skins” is coming true.

The Confederation of British Industry believes that the economy will grow at its fastest rate for three years in the second half of 2024. This will provide a significant bonus to whoever wins the election, but in the case of Labour, it will solidify the traditional “honeymoon period” that a new government generally enjoys.

Both the main Parties will publish their manifestos this week. This will only increase the constant sniping that is fast becoming a prominent feature of this election campaign.

While the Tories have alluded to keeping to the plan they have had in place since Sunak became Leader, the Labour Manifesto will be picked apart to find how they will find the funding for several policies, like bringing down NHS waiting lists, improving social care and providing more teachers to improve the level of education.

The employment report for May will be published later this morning. The employment rate is predicted to remain at 4,3% while average earnings including bonuses are still worryingly high at 6%. While Sunak has taken credit for bringing inflation down, he has done nothing to drive wages, a significant contributor to inflation down to a more stable level.

GDP for the first month of the new quarter is expected to be flat after a 0,3% rise in April while manufacturing output fell by 0.2%.

Last week, the pound fell to a low of 1,2694 versus the dollar as the Greenback found support at the lower end of its short-term range. It closed at 1.2720. Meanwhile, versus the single currency, it rallied to a high of 1.1781 and closed at 1.1770 as the ECB cut interest rates.

USD – Market Commentary

Wage growth is still well above the rate of inflation

There was a report from a senior economist published last week that spoke of the fact that the U.S. is “nowhere near” a recession and the Fed’s current policy of delaying any cut in rates while inflation refuses to fall close to its target is correct.

His comments were proved correct as the economy created 272k new jobs last month, well above the market’s prediction and significantly higher than expectations for this stage in the economic cycle.

It seems that the pause in rate increases that the FOMC agreed to last July. In the intervening ten months, there has been no noticeable fall in job creation which has driven the economy to grow at an impressive 5% since the end of Q3’23.

However, of continued concern to the Fed will be the rise in hourly earnings from 4% to 4.1%.

Several FOMC members have called for patience over inflation expecting it to begin to fall over the next three months which will allow it to start to cut rates.

That patience is seemingly justified, but time is running out for the economy to achieve its fabled soft landing over the next two quarters.

The Fed’s “dot plot” had previously signalled four rate cuts in 2024. That expectation has now fallen to two cuts, while several FOMC members agree that it may not be possible to cut rates this year at all. That is a notable change to the market’s expectation at the turn of the year.

The IMF has again voiced its concerns about the country’s ballooning fiscal deficit which stood at $1.7 trillion at the end of last year according to official data, and has no doubt increased further since.

The Fund is concerned that given debt levels, even a moderate downturn could turn into a major crisis.

Despite the economy creating a considerable number of new jobs last month, the unemployment rate “ticked up” to 4%.

The FOMC will meet this week and while there is considered no chance of a change in monetary policy, it is expected that the Fed will keep its moderately hawkish stance. Since the last FOMC meeting, Jerome Powell has remained on the sidelines allowing his colleagues from regional Federal Reserves to provide commentary on data releases.

The dollar was originally unaffected by the cut in interest rates that was announced by the ECB, but the experienced divergence in monetary policy that was all but confirmed by the May employment report gave it a degree of impetus.

Last week, the dollar index rallied to a high of 104.95 and closed at 104.90. It has begun the week on the front foot in Asian trade, so far-reaching a high of 105.29.

EUR – Market Commentary

“Big Four” economies grew in Q1

GDP growth returned to the four “major economies” of the Eurozone as the region returned to overall growth after suffering a mild recession.

After two successive quarters of 0.1% contraction in the second half of 2023, the 20 nations that use the single currency posted growth of 0.3% between January and March.

The economies of Germany, France, Italy and Spain each experienced growth, but it was Spain and Italy that shone. Italy grew by 0.3%, above the average rate for the rest of the region, while Spain grew by 0.7%.

Of the smaller EU economies, the best performing was Ireland, which grew by 1.1% in the first three months of 2024, and Latvia, Lithuania and Hungary, which expanded by 0.8%.

While counting is still taking place in the EU Parliamentary Elections there was a marked swing to the right. Italy’s Brothers of Italy led by Prime Minister Georgia Meloni saw its support increase while Far Right Parties in Hungary, Germany and Austria made gains.

Ursula von der Leyen, the President of the European Commission spoke of her belief that the Centre-Right had maintained overall control of Parliament.

However, the biggest loser was Emmanuel Macron in France. The vote for his Renaissance Party was decimated leading him to call a snap General Election. The big winner in France was the Nation Rally Party whose leader Marine le Pen saw significant gains.

The Belgian Prime Minister also resigned in the face of a significant swing to the right in his country.

Barely two years into his second term in office, Macron has bowed to calls from the Leader of National Rally, Jordan Barella, for Presidential Elections.

This is a huge risk for Macron who could have avoided calling an election in the hope that the Euro 24 football tournament, which his country is among the favourites to win, and the Paris Olympics would provide him with a little “breathing space”.

Despite the surge in support for the hard right, von der Leyen was re-elected as President of the European Commission, as her European People’s Party managed first place in the election, securing 184 votes.

It became clear that the market supported the cut in interest rates by the ECB last week as the Euro gained following the announcement. However, the market view on the divergence of monetary policy was made clear by the performance of the single currency following the release of the May employment report from the U.S.

It sank to a low of 1.0799 and closed at 1.0801.

In Asian trade this morning it has fallen further, to a low of 1.0748.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.