11 March 2024: Now the BoE drops to the back of the queue

11 March 2024: Now the BoE drops to the back of the queue


  • Has the rebound begun?
  • 275k new jobs were added in February, but the January figure was slashed!
  • Forget about growth, the inflation estimate is falling
GBP – Market Commentary

BoE staff receive another bumper pay rise

The “race” to cut interest rates is expected to continue for at least the rest of the first half of the year, as the Bank of England is now believed to be the last of the G7 Central Banks to cut interest rates.

Following last week’s moderately well-received Budget, the Government will receive the news that the recession which began at the end of last year has already ended.

Figures due this week should confirm that the UK recession was short-lived, providing some relief for Rishi Sunak’s under-pressure government. A significant increase in retail sales will account for almost all the expected 0.2% increase in activity in January.

The consumer is beginning to show more confidence that the economy may have “turned a corner”, as Sunak has promised in recent speeches.

Andrew Bailey, the Governor of the Bank of England, produced a “do as I say, not as I do” moment last week as he approved a pay increase of 4% for Bank of England staff and an added 1% on top as a salary top-up.

The top-up is to ensure that staff are being “fairly compensated” since wages rose by well below the inflation rate in the recent past.

This is exactly the deal that NHS Junior Doctors and Teachers are demanding, but while those sections of the public sector have gone on strike and still not got anywhere, all Bank of England staff have had to do is “ask politely”.

A spokesperson for the Bank said that the above inflation increase was to ensure that pay remains competitive.

Mr Bailey told British workers in June last year, they would have to refrain from making wage demands if they wanted to bring inflation down.

Institute of Fiscal Studies members who have been poring over the details of Jeremy Hunt’s Budget agree that whoever wins the election, due to be held by January next year, at the latest, will inherit an economy that is “in a mess”.

Hunt is still trying to gain the market’s confidence following Liz Truss’s disastrous but thankful short-lived period in charge. The only positive argument for Truss’s economic policies was that they reflected traditional Conservative values of low taxation and public spending. Rishi Sunak was never a “traditional” when he was Chancellor, apparently refusing to cut taxes when instructed to do so by Boris Johnson.

Sterling has benefitted from Andrew Bailey’s recent silence over interest rate cuts and the speech made by Huw Pill last week, in which he said that a cut to interest rates was still “some way off”.

The pound rallied to a high of 1.2893 last week and closed at 1.2850. The market is still enthralled by when interest rate cuts will take place and currently is showing little interest in the relative performance of G7 economies.

USD – Market Commentary

This month’s FOMC meeting is likely to be another non-event

The employment data which was published on Friday gave traders the impression of giving with one hand and taking away with the other. The headline non-farm payrolls number showed an increase of 275k, far more than the market’s baseless prediction of 200k, but the January addition of 353k jobs was slashed to 229k.

The employment report is notoriously difficult to predict, given the number of estimates that are included.

The data further “muddied the waters” for economists and market commentators trying to decipher the FOMC’s intentions, based on a view that the Fed is still “data-dependent”.

The market would do better to listen closely to the advanced guidance that it is receiving from Jerome Powell and his colleagues. At the end of January, there appeared to be a split with the permanent members, including Powell, of the FOMC wanting to hold back on a rate cut until inflation was confirmed to be on a definite path lower, while several Regional Fed Presidents were concerned that the economy might begin to suffer unless it received the boost of a rate cut as sentiment appeared to be waning.

Comments made by Neel Kashkari, Raphael Bostic, and Mary Daly during February have led the market to believe that they have “fallen into line” and that there will be no rate cut at next week’s meeting.

The only potential concern for Central Bankers is the issues beginning to concern the commercial real estate sector, particularly in major cities.

This issue has been highlighted by the news that IBM has leased a significant space in New York but plans to combine several disparate spaces in the City since they see that the trend towards home-working means that they are trending several floors of prime space that is standing empty.

Realtors in the City are finding zero interest in the vacated properties, despite “bargain-basement” rental costs.

The dollar was under pressure last week, but traders are not fearful of a significant bout of weakness for the Greenback, given the level of growth and activity that is taking place currently.

The dollar index fell to a low of 102.34 last week but recovered to close at 102.76 as traders went shopping for bargains. With the ECB now considered “favourite” to be the first G7 Central Bank to cut interest rates, the dollar could be on the verge of a significant rally.

EUR – Market Commentary

The Eurozone has avoided a recession, but only just

A “technical” recession was just about avoided by the Eurozone, as data published on Friday showed that its economy flatlined in the fourth quarter of last year and grew by just 0.1% year-on-year.

The ECB meeting which took place on Thursday showed that the Central Bank is not bothered by an economy that is “bumping along the bottom”, as long as inflation, which they believe is a far greater potential cause for concern, remains on a downward path.

Although the Hawks still appear to be in control of the Bank’s Governing Council, there was a surprisingly dovish comment from “Hawk in Chief”, Robert Holzmann, on Friday.

Speaking to the Reuters news service, Holzmann said that he feels that the ECB “may be preparing” for a rate cut.

“One of the decisions made yesterday was no change, but a change may be in preparation”, said Holzmann, an outspoken conservative who has long warned about premature easing.

There is a growing sense that a cut in rates will take place at the June meeting of the Governing Council. It would be ironic if, after months of speculation, the ECB and FOMC announced a cut in the same month. Since there is no “emergency” currently, there is no reason to believe that the first cut will be anything other than twenty-five basis points.

The Eurozone economy is in desperate need of stimulation, and a rate cut would seem to be the only “medicine” that will help.

The view that first-quarter wage increases need to be at or below the rate of inflation is a major hurdle for an economy as diverse as the Eurozone’s. There are member states that have made great progress in reducing inflation whose pay, particularly in the public sector, exceeds overall inflation, which makes a fiscal union even more vital.

The question remains, “What will happen after rate cuts begin”, particularly if activity remains sluggish? There are systemic changes needed, both to the overall economy and individual economies.

With the elections to the European Parliament taking place in June, MEPs may wish to continue to “bury their heads in the sand”, rather than face any adverse reaction from their “constituents”.

The Euro saw some significant buying last week as short positions saw their stop losses triggered. Longer-term bears will have “kept their powder dry” to allow for the turnaround at, or just above, the 1.10 level, where there is significant interest to sell.

Last week, the common currency rose to a high of 1.0981 but was unable to deal with such a rarefied atmosphere and fell back to close at 1.0936.

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.