12 April 2024: Has Sunak made any progress?


  • The economy grew in February, but only just
  • Kashkari’s comments look scarily prescient
  • Rates stay at an all-time high despite a “weak economy”
GBP – Market Commentary

The election will still be fought against a backdrop of a weak economy

When he became Prime Minister, Rishi Sunak made five promises about his priorities: Halve inflation, grow the economy, reduce debt, reduce waiting lists and stop the boats.

Other than the halving of the rate of inflation, which he can hardly claim to have “had a hand in”, his record so far has been pretty abysmal.

The economy indeed appears to have scraped its way out of the recession that it dipped into in the final two quarters of 2023, but data published yesterday showed growth of just 0.1% in February, following a 0.3% rise in GDP in January, hardly a result to shout from the rooftops.

His efforts to reduce immigration have barely got off the ground, due in no small part to the efforts of his backbenchers, while the national debt has barely changed while households are still struggling with the cost-of-living crisis.

The NHS is close to being swamped every month now, with the so-called “winter crisis” now having given way to an “all-year-round crisis”.

Ambulance waiting times are continuing to lengthen, while the number of patients waiting twenty-four hours or more to be seen in emergency departments is at a record high.

Sunak would have us believe that he is making progress but, in truth, in all aspects that count, the country is still in reverse.

Halving inflation, which he can claim has been a “tick in the box” has fallen almost entirely due to the level of official interest rates and the reduction of post-pandemic fiscal support.

He was “lucky” to have been chosen when he was since inflation appears to have stalled at its present level of 4.8% as the effect of interest rate increases has finally worked its way through the entire economy.

Energy prices have fallen considerably over the same period, which accounts for a significant part of the fall in inflation.

Sunak’s “report card” for his first eighteen months in office should read “could do better” but he has neither the time nor the backing of his MPs to do anything other than “put on a brave face” and await his almost inevitable fate.

Megan Greene was the latest member of the MPC to call upon her colleagues to show caution when deciding when the first cut in rates should take place.

There has been a change in the market’s belief that there would be at least three cuts in rates this year, most likely beginning in June. That has now changed, given the “stickiness of inflation” to “maybe” two cuts beginning in September.

In agreeing that rate cuts are still “way off” she added her voice to the growing number of MPC members who are concerned that an early cut would reignite inflation.

The pound continued its fall from Wednesday in early trading, but the market’s belief that rates won’t be cut imminently saw it rally later in the day against both the dollar and the Euro.

Versus the Greenback, it climbed to a high of 1.2578, closing at 1.2552, while against the Euro, it reached a high of 1.1708, closing at 1.1702.

USD – Market Commentary

There are no takers for an early cut in interest rates

It is perhaps ironic that the minutes of an FOMC meeting that were expected to have minimal effect on the market view on the tightening of U.S. monetary policy, had the effect of being the “final straw that broke the camel’s back”, as traders and investors finally woke up to the fact that the economy is in a robust condition and that inflation is proving a tougher opponent than the Fed had realized.

While there has been a change in the rhetoric of several members of the Committee over several months, it is only now that the point appears to have been hammered home that the market has awoken from its laissez-faire attitude to find that the four rate cuts that have been expected to take place this year have been reduced, to possibly two or maybe none at all.

The level of new jobs created has shown a degree of strength that in other times would have led to the rate being increased, as demand continues to exhibit a significant degree of strength.

There are still naysayers who believe that a slump is on the way and rates should be cut to pre-empt any thought of a recession, but Jerome Powell is enough of a conservative, in every sense of the word, to resist those pressures.

Fed Governors who make up the permanent membership of the FOMC “saw the light” several months ago and began to advise against a rate cut in June, which that considered to be premature, and they have been joined by the most experienced Regional Fed Presidents to create a seismic change in Fed policy that the market was unable to ignore.

John Williams, the President of the influential New York Fed, joined his colleagues yesterday, commenting that the Fed should be in no hurry to cut rates, given the rising concerns about the level of inflation.

The dollar index has finally seen a rally that had been threatened for as long as Powell had advised caution about the rate at which deflation was happening.

The cause of the “stickiness” of inflation is based more on internal factors than in the rest of the G7 since the U.S. economy is growing at a place that is well above trend.

For this reason, it is less susceptible to geopolitical upheaval and can afford to leave rates unchanged for a prolonged period.

The dollar has been waiting for such news to finally seep through into the market’s consciousness, and the reaction has been seismic.

Yesterday, the index continued its rally, reaching a high of 105.52 and closing at 105.28, its highest close since early November.

EUR – Market Commentary

A June cut is no longer certain

There is a level of caution being shown by the Governing Council of the ECB that is wholly unwarranted by the recent data releases relating to inflation and economic activity.

Following the latest meeting of the Committee, there was still caution being expressed about price pressures that exist in the Eurozone and concern that a rate cut may see inflation re-ignite.

Without saying so, in so many words, Christine Lagarde is concerned that the data for first-quarter wage settlements won’t be as positive as has been expected.

While the anecdotal evidence so far points to wages still climbing at a rate that is above inflation, it is impossible to expect wage demands to have fallen as precipitously as inflation given the “breakneck” pace at which inflation has fallen.

There may well be reasons given between now and the June meeting for caution about a cut in rates.

With the single currency facing severe pressure from the notion that the Fed may not cut rates at all this year, or if it does it, will be deep into the final quarter of the year, any further fall in the value of the euro may well lead to a rise in inflation.

Although resisting the temptation to cut rates at the latest meeting despite the headline rate of inflation “knocking on the door” of the Central Bank’s 2% target, Lagarde accepted that the economy remained “weak” in the first quarter.

She needs the help of EU Commission President, Ursula von der Leyen, to put in place the structural reforms that are desperately needed.

Fiscal reform is most desperately needed, with a fiscal union still appearing to be little more than a long-held desire.

The fact that the ECB’s decisions on monetary policy can be diluted by opposing fiscal policy decisions from individual Eurozone members has without doubt prolonged the present crisis.

The euro looks to be on the cusp of a significant fall with little or no interest to buy, even at the present “bargain-basement” level.

Yesterday, the single currency fell to a low of 1.0699 and closed at 1.0725.

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.