14 February 2024: Banks remain in good health
Central banks sit on their hands


  • The election campaign has changed direction
  • Inflation data may cause the Fed to rethink the rate-cut agenda
  • The Far Right is expecting big gains in Parliamentary elections
GBP – Market Commentary

Wage growth slows but still outstrips inflation

Bank of England Governor, Andrew Bailey, took time out from directing the country’s monetary policy yesterday, to reprise his previous role as Head of the Financial Services Authority.

He spoke of how robust he believes banks in the UK have become, having embraced new regulations that have been put in place to support them following a period of severe macroeconomic disruptions over the past four years.

However, he is “bewildered” by the fact that the bank’s share prices have been “stagnating” despite “significant” profitability and relatively low provisions for bad debt.

The level of bank reserves with the Bank of England has grown over the past two years, and this adds to the nation’s financial stability.

Bailey’s comments were a distraction from his “day job” which has thrust him into the limelight since he took over from Mark Carney, a Governor who was “adored” by the City.

Bailey is far more of a bureaucrat than Carney and lacks the flair to do anything but “do things by the book” It is unlikely that Carney would have settled for a long series of twenty-five basis point hikes to push back against rising inflation, while Bailey was concerned about the effect more rapid tightening of monetary policy would have had on growth. The economy is now in the doldrums, in any event, and the Bank is facing pressure to cut rates.

The campaign to form the next Government has taken a less predictable turn, as the Labour Party has been forced to suspend two prospective candidates at upcoming by-elections due to their anti-Israel and anti-Semitic comments.

Sir Keir Starmer, the Leader of the Labour Party, vowed to rid the Party of its anti-Semitic undertones when he took over, but it seems that the malaise still lingers and will be leapt upon as a way for the Conservatives to cut the deficit they are facing in the polls.

The January employment report was published yesterday. It showed that the rate of growth in wage settlements is failing, but as today’s inflation data will show, they are still above the rate of inflation. The Bank of England hopes that both will continue to fall in the coming months and allow for rate cuts.

Average earnings including bonuses fell in the three months to January to 5.7% from 6.8%. The headline rate of inflation, which will be released later this morning, is expected to have risen marginally as the fuel prices rose last month, mostly due to the attacks on shipping in the Red Sea.

Sterling lost ground against the dollar yesterday as the U.S. inflation data showed that prices fell less in January than the market had expected. This means that the recent comments from FOMC members that a rate cut is not going to take place at the next meeting are backed up by data.

The pound fell to a low of 1.2573 and closed at 1.2589.

USD – Market Commentary

Headline prices fell by less than expected

The core rate of inflation was unchanged in January at 3.9% while the headline rate did not fall by as much as the market expected due to the slight rise in energy prices.

Headline inflation fell to 3.1% from 3.4% in December, while the market had expected it to come in below 3%.

This was another “nail in the coffin” of market expectations that a rate cut could take place at the March FOMC meeting.

With January’s jobs data still showing robust growth, having created over 300k new jobs over the past two months, hopes of a rate cut were fading anyway.

Although the economy appears to still be heading for a fabled soft landing, there will be concerns about just how fast inflation is moderating. Although there is no question that Jerome Powell timed the pause and then the end to rate hikes right, he is justified in wanting rates to remain unchanged “for now.”

Recent comments from his colleagues on the FOMC, who represent regional Feds, have shown that they were willing to be “convinced” that a cut in rates would be “appropriate.” Their expectations will have been dashed, and the minutes of the FOMC’s next meeting will show that they have fallen more in line with Powell’s views.

Following the NABE poll result that 21% of its members feel that interest rates are too restrictive and comments by renowned economists that the Administration is “at odds” with the Federal Reserve, President Biden is coming under increasing pressure regarding his handling of the economy.

The significant increase in the fiscal deficit during Biden’s term in office means that inflation has become more difficult to control than it has been historically. This is one of the reasons why Biden is currently trailing Trump by 11% in polls regarding which of the two would be a better President for the economy.

Yesterday’s disappointing inflation data saw the dollar get an unexpected boost.

The market expects that any rate cut will now most likely take place in April, or even May. The dollar index rallied to a high of 104.96, and it closed at its highest level since mid-November at 104.86.

EUR – Market Commentary

There is little need to discuss policy every six weeks

To quell the growing number of comments, either dovish or hawkish, about when it will be appropriate for interest rates to be cut, the ECB appears to have come up with a novel potential solution.

The ECB is considering a more flexible approach to when monetary policy meetings of the Governing Council could be held.

The current “standard” amongst G7 Central Banks is for meetings to be held every six weeks, but just as the 2% target is of no real consequence, there is no reason for the six-week cycle.

It is believed that the ECB is considering a two, or three-month gap to allow the economy time to “catch up” with monetary policy decisions and reduce the amount of speculation that is fuelled by the six-week cycle.

Switching to a two or three-month gap may also promote a greater degree of harmony amongst the Governing Council, as they would be more likely to agree on the need for a change to monetary policy at a particular meeting.

Despite the “grilling” that the German Finance Minister received earlier this week about the faint possibility that the country could favour a withdrawal from the EU, it was reported yesterday that investor confidence in Germany has bottomed out, even if it has not yet begun to improve.

The ZEW survey of economic sentiment rose to 25 from 22.7 last month, although current sentiment fell further from -77.3 to -81.7.

It is true of most eurozone data for January, that the economy is bottoming out. Only employment numbers are still showing a month-on-month improvement.

A rate cut may be the only ingredient that is missing for the economy to finally begin to improve, but until the ECB can be confident that there won’t be another spike in energy prices and the Q1 salary data shows a significant fall in the level of wage increases, the Governing Council is likely to retain its hawkish outlook.

The Euro suffered at the hands of a stronger dollar yesterday. It fell to a low of 1.0700 and closed at 1.0707.

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.