11 July 2022: Mann takes on Saunders’ role

Mann takes on Saunders’ role

11th July: Highlights

  • Queue to replace Johnson growing
  • Economy cooling but still no concrete signs of recession
  • ECB will need to start to worry about the euro. 17% fall in a year.

GBP – Companies losing faith in BoE actions

The race to succeed Boris Johnson as Leader of the Conservative Party and Prime Minister will begin in earnest this week as the rules of the contest are set out by the backbench 1922 committee.

At the last count, eleven MPs had thrown their hats in the ring. Former Chancellor of the Exchequer Rishi Sunak is the clear favourite to win the race, with today’s newspapers proclaiming that the poll of the last two standing will consist of Sunak and one of the other ten.

One of the most significant debates is over taxation, with Sunak implying that those candidates promising tax are simply playing to the crowd, since the funding for such a policy will need to be found from somewhere.

The opposition parties continue to criticize Boris Johnson for clinging to power by insisting that he remain in office until his replacement is elected. There have even been suggestions that a number of the replacements announced by Johnson, in the wake of last week’s mutiny, have been selected to make the new leader’s job more difficult.

The economy continues to falter as inflation shows little sign of abating. Price rises, particularly in foodstuffs, have become so stark that shoppers notice many items increasing in price week by week.

The price of petrol on garage forecourts appears to have slowed, with the price of two pounds for a litre of regular unleaded fuel seeming to cap the rise in prices for now.

It was announced at the end of last week that the cost of an average family’s energy bill will rise to approximately £3,300 following the anticipated rise in the cap this Autumn.

With Michael Saunders leaving his role as a member of the Bank of England’s Monetary Policy Committee in September, his colleague Catherine Mann appears to have taken on his role as hawk in chief.

Her recent comments on monetary policy have been more aggressive concerning the front loading of interest rate hikes. It is clear that so far, the policy of little and often that the Bank has adopted has seen it fall between fighting inflation and supporting the economy. According to recent comments from the Bank’s Chief Economist, that the pace at which inflation has risen has come as a shock and the policy decisions that have been taken are insufficient to bring it back below the target set by the Government.

Last week, Sterling came under severe pressure from a surging dollar. It fell to a low of 1.1871, but it managed to attract a little burying interest at lower levels and rose to close at 1.2031.

Recommend our services and earn up to £75 per successful referral

USD – 372k new jobs created in June

There have been comments from several former officials of the Federal Reserve and Treasury regarding the rising inflation that continues to blight the U.S. economy.

Larry Summers, who was treasury Secretary between 1999 and 2001, and served in Barack Obama’s Administration as Director of the National Economic Council, made headlines last week, by insisting that the only way in which the current round of inflation can be controlled is by a huge rise in the level of unemployment.

That may be a cure for inflation, but it would do further damage to the economy that would take years to repair.

According to Friday’s release of the June employment report, Summers’ wish will not be realized for some time.

The report showed that 372k new jobs were created in June, this was appreciably higher than the market had predicted and called into question the process by which analysts and economists make their predictions. It is close to impossible to gather sufficient data to make anything more than an educated guess, and that is often way off the mark

The unemployment rate remained at 3.6% as job hoppers contributed to the rise. The average rate at which wages rose reached 5.1% which will add to the pressures being exerted by the inflationary spiral where wages rise, driven by inflation, that leads to higher inflation driven by increased costs.

Overall, the data confirmed the belief of several commentators that the economy isn’t heeded for a recession in the short to medium term.

The FOMC is expected to continue to hike interest rates, with its next meeting taking place on July 26-27.

While the FOMC could drive the economy into recession itself, with its programme of rate hikes, its Chairman Jerome Powell believes that dealing with the current issue of rising inflation is far more important than being concerned about an issue that so far has no basis in reality.

His opinion is backed by most of his colleagues. There is a growing expectation that there will be a seventy-five-basis point hike at the next meeting as the Fed tries to reach the neutral level where the economy is neither supported nor stimulated.

Last week, the dollar index took off again after a lull. A hawkish but not unexpected set of minutes from the latest FOMC meeting proved to be a supporting factor.

The index reached a high of 107.79 and closed at 106.88.

EUR – Austria and Germany joining forces

The President of the Austrian Central Bank Robert Holzmann spoke over the weekend of the need for the ECB to raise interest rates by one hundred and twenty-five basis points by the end of September if it wants to signal to the markets that it is serious about fighting inflation.

He went on to say if that is insufficient to see price rises at least level off, then a further seventy-five should be added at the October meeting.

The issue that the ECB is facing is that any amount of inflation is unacceptable to several nations of the Union, while others see it as part of the economic cycle, an almost inevitable fact of life.

Austria and Germany, in particular, supported by Belgium, The Netherlands, and Finland, do not see it that way and believe that any sign of rising prices should be nipped in the bud.

Holzmann’s comments followed an equally hawkish speech by Bundesbank President Joachim Nagel, who made almost identical points.

The issue of inflation within the Eurozone begins with its calculation. Using an average of the rate of growth in every member state means very little, since the range is wide and widening.

The Baltic States for example are suffering from price rises of close to and in one case exceeding 20% due to the effect of their proximity to the war in Ukraine, which has decimated supply chains. While this has driven demand, it is not that which is raising prices.

The upcoming meeting of the ECB Governing Council will prove to be difficult for Christine Lagarde to manage.

There will be Central Bank Heads who understand the need for rates to rise but are concerned about the effect on their nascent recovery, those, like Italy, whose economies are already in recession and the hawks lined up trying to defend their own economies.

Meanwhile, the euro looks like it will test parity versus the dollar in the coming days or weeks. While there is a degree of buying interest at these historical low levels that haven’t been seen for twenty years, the economic reality is that the divergence in monetary policy between the U.S. and Eurozone is likely to narrow any time soon.

Last week, the euro fell to a low of 1.0071 and closed at 1.0185 as a few bargain hunters emerged.

Have a great day!
About 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.”