12 April 2023: Megan Greene joins MPC


  • IMF confirms its view about the UK economy
  • Yellen believes the economy is strong and the banking system resilient
  • IMF raises Eurozone growth forecast, but expects German recession
GBP – Market Commentary

She will replace arch dove Silvana Tenreyro

The IMF reiterated its view that the UK economy will be one of the worst performing major economies. It expects the country to experience a contraction of 0.3% during 2023, although this is a slight improvement over its previous outlook.

It expects a marginal rebound in 2024 when it believes that the economy will grow by 1%. The continuing high price of gas, although it is now receding, the rise in interest rates and trade performance still affected by Brexit are cited as the main reasons for the decline.

The Office for Budget Responsibility agrees that the economy will contract by but by slightly less than the IMF prediction. It estimates that there will be a contraction of 0.2% but no recession.

The Chancellor of the Exchequer, Jeremy Hunt, struggling to find any positives in the IMF report, commented that the UK has upgraded its own forecasts for this year as well as 2024 and 2025. He pointed out that the IMF has praised the Government for its current economic policies that will eventually lead to sustainable growth.

Hunt also announced a change to the makeup of the Bank of England’s Monetary policy Committee yesterday. Silvana Tenreyro will leave in early July. She will be replaced by Megan Greene.

Tenreyro has been a member of the rate setting committee since 2017 and has been vocal recently about her fears that interest rate increases may cause inflation to fall too far and has advocated for no increase at the past two meetings.

Greene is currently Global Chief Economist at the well known and respected Kroll Group. A U.S. owned advisory company.

She has a breadth of experience and commented yesterday that she is looking forward to playing her part in shaping economic policy going forward. While her views on the current economic situation are not clear, her appointment is expected to see the general outlook of the MPC to become more hawkish.

Yesterday, the pound steadied after its recent correction. It reached a high of 1.2456 and closed at 1.2424.

Today, Bank of England Governor Andrew Bailey will speak at the annual IMF meeting in Washington. He is unlikely to say anything new about the Bank’s attitude to interest rate increases, although he may agree that the end of the global cycle of fate increases is coming to an end.

USD – Market Commentary

Moody’s calls for pause in rate hikes

Today’s release of inflation data has taken on more significance as the Federal Reserve comes close to ending its programme of tighter monetary policy.

It is true of all tier one data now that interest rates are at or close to neutral. FOMC members continue to make their own statements about the current situation in their own regions.

Neel Kashkari, the President of the Minneapolis Fed spoke yesterday of his view that a recession remains a possibility, but he believes that any downturn would be made far worse if inflation were not brought under control.

He went on to say that tighter monetary policy may cause a technical recession but also showed concern about any possible credit crunch brought about by stresses in the financial community.

He sees inflation at or close to 3.5% by year-end, still well above the Fed’s 2% target, but interest rates are unlikely to rise too much further.

Patrick Harker, the President of the Philadelphia Fed, added that the Central bank must be careful not to overdo interest rate increases, particularly now that rates have reached a sensitive point.

He feels that although the stresses in the banking community have calmed down considerably, the worst is probably over,

The new President of the Chicago Fed, Austan Goolsbee, reiterated the words of Harker, although he did show more concern about the stresses in the financial sector. He urged caution on interest rates, although financial stability will not be achieved solely through monetary policy.

Today’s release of CPI data is expected to see a fall in the core to around 5.2%, from 6% last month while a slight rise in the more volatile headline number is likely.

While Jerome Powell remains committed to driving inflation down, there has been a shift to a more balanced view of the economy from the FOMC recently.

The dollar index lost ground yesterday following its recent correction higher. It fell to a low of 102.01, retracing its gains from the previous session, and closed at 102.15.

EUR – Market Commentary

De Cos concerned about growth of core inflation

The upturn in expectations for the Eurozone economy appears to be surviving poor economic data releases that have been seen recently.

Yesterday’s release of retail sales data showed that consumers are still concerned about high inflation and voted with their feet. Retail sales fell by 3% in March after a 1.8% fall in February.

The first quarter of 2023 saw a rise in investor confidence which was reflected in the IMF’s outlook for the region in 2023.

It slightly raised its expectations for growth this year to 0.8% from 0.7% previously. It sees a shallow recession in Germany but expects the economic powerhouse to make a strong comeback in 2024.

It is interesting to note that the IMF has downplayed the effect of the war in Ukraine on the Eurozone while it feels that the UK economy will remain significantly affected by Brexit.

The IMF’s view on Germany is at odds with both official estimates and the views of several think tanks who see the country’s economy improving over the second half of 2023 as the energy price shock that it experienced in the second half of 2022 recedes.

The German Ministry of the Economy has forecast that the economy will grow at 0.2% this year.

The 200 billion euro relief package that was provided by the German Government has had a greater effect than had been previously expected according to the Ministry.

The IMF has also taken note of the hawkish outlook of the ECB regarding tighter monetary policy. The view of the market is that the Central Bank will continue to raise rates well into the third quarter while other G7 nations have called a halt.

Spanish Central bank Governor and ECB Governing Council member Pablo Hernandez de Cos spoke yesterday of his expectation that inflation in the Eurozone will remain high for the rest of 2023. This will mean that the market should be prepared for further rate hikes.

His concern centres mainly around the core rate of inflation which isn’t falling as fast as the ECB had hoped.

The euro recovered from its recent fall yesterday. It rose to a high of 1.0928 and closed at 1.0911, rekindling the chance of a possible test of the 1.10 level.

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.