14 August 2023: The MPC is split three ways


  • The economy surpasses estimates again
  • California, the outlier in the economic recovery
  • Food inflation remains high in Spain despite overall price falls
GBP – Market Commentary

Doubts remain about when hikes will end

Inflation is expected to have fallen last month by more than one per cent, which will provide some encouragement to the MPC for it to consider when to pause or halt entirely the current cycle of interest rate hikes.

However, wholesale price increases already in the system may see some of that fall reversed in September. This will be a double-edged sword for one section of the community.

The “triple lock” on state pensions and other benefits will be applied next April and is expected to be well above the rate of inflation at that time.

At its most recent meeting, the MPC showed a three-way split, with the independent members all having differing views of what the Bank of England should do with monetary policy.

Swati Dhingra voted for no change, while Megan Greene voted in line with the permanent members of the committee for the twenty-five-point hike, which was eventually agreed upon, while Catherine Man and Jonathan Haskell voted for another fifty points.

Before the meeting, according to various comments she had made, it was felt that Greene may be more dovish than it eventually turned out. Time will tell if her opinion changes.

While the permanent members of the committee hold sway, it must be hoped that some notice is taken of the views of the independent members since the Treasury may begin to question their role and begin to question its entire makeup.

There was better news for the economy with the release on Friday of growth data for the period between April and June.

The economy beat estimates by growing by 0.2% in the second quarter of the year, with 0.5% growth posted in June alone.

Since the IMF suggested that the country will avoid a recession this year, there have been several mixed indicators published. GDP is one of the most noted pieces of data despite being two months out of date when it is released.

When an economy is coming to the end of a long period of changes to monetary policy, or there is a major change to fiscal policy, such as a budget or spring update, the date can become skewed in either direction.

This is an important week for data releases, with the July employment members due tomorrow and inflation on Wednesday. Studies of the employment report have veered away from the absolute number of jobs gained or lost to concentrate on wages. It is predicted that average earnings will have risen by 7.4% after a 7.3% increase in June.

As already mentioned, headline inflation is expected to have fallen to 6.8% from 7.9% in June, mostly due to falling food prices.

The pound posted its fourth weekly loss in succession last week. Versus the dollar, it fell to a low of 1.2666 and closed at 1.2696.

USD – Market Commentary

Powell is close to achieving his 2023 goals

The minutes of the latest FOMC meeting will be released this Wednesday. Over the past week or so, there have been plenty of comments made by voting members of the committee which betray their intentions for the next meeting, which will be held in the middle of next month.

The fact that several Regional Fed Presidents have already discussed the current situation regarding growth and inflation in their regions may render any impact of the last meeting irrelevant, although it will be of some interest to observe how close they came to agreeing on a further pause.

Data released so far this month has been inconclusive, with employment indicating a soft landing is within reach, while headline inflation rose marginally in July.

There are still discussions taking place about whether FOMC policy will see the economy nosedive into a recession or produce the “Central Bank Holy Grail” of a soft landing.

One of the states showing the most confusion is California. With a population two-third the size of England, the state has a huge part to play in next year’s Presidential Election.

It is one of the three key states to the Democrats, the other two being Illinois and, perhaps surprisingly, New York.

California’s verdict on the performance of Joe Biden will go some way towards driving the result of the election.

Having seen Silicon Valley Bank collapse earlier this year, Californians no longer feel insulated from the economic concerns of the rest of the country, and there were fears that their “tech bubble” may burst. However, since there appears to have been little or no contagion from the collapse, they can breathe a little more easily.

A significant indicator of the continued improvement, or otherwise, of the economy will be released this week with the publication of retail sales data for July.

The data, due for release tomorrow, is expected to show that sales, while still sluggish, are on a path upwards.

This should provide more encouragement to the FOMC that a soft landing is still probable. The Central bank will be content with “mediocre” data as long as the trend remains positive. The dollar index looks to be headed for a test of resistance at 104.60 as it posted its fourth consecutive weekly gain. It reached a high of 102.91 and closed at 102.86.

EUR – Market Commentary

Decision on rates, too close to call

Opinion is still being presented as fact as market analysts and commentators struggle to find any officials of the ECB prepared to comment on what has become the only story in town, the probable outcome of the September meeting of the Governing Council of the ECB.

Recently it appeared that the doves had gleaned sufficient votes to see a pause be agreed upon. Particularly considering the alarming news of suffering coming out of Germany. However, a report in the German Press this weekend appeared to confirm that the Bundesbank is as resolute as ever about continuing the fight against inflation.

This week will see the release of several important leading indicators for both the German and wider Eurozone economy.

The influential Munich-based ZEW Institute will report that current conditions in both economies have improved but still has concerns about economic sentiment.

This view points to a tacit acceptance of the monetary tightening that has taken place so far but shows concern about the scale of any future rate increases.

It will be another couple of weeks before officials return from their holidays and some semblance of understanding can resume.

Employment data and Industrial production figures will be released tomorrow. They are expected to show that the Eurozone economy is still struggling to remain in positive territory, while Q2 GDP figures are expected to be unchanged from the previous estimate at 0.6% YoY and 0.3% MoM.

Inflation data for July is due for release on Friday. The headline is expected to remain unchanged at 5.3%, which will encourage the hawks, while the core is expected to fall marginally.

The euro remains in a narrow but lower range, also having posted its fourth consecutive weekly fall.

It reached a low of 1.0929 and closed at 1.0933. This was the first time since mid-April that it had closed below 1.10.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
11 Aug - 14 Aug 2023

Click on a currency pair to set up a rate alert

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.