15 April 2024: Bernanke completes his review


  • The economy grew in February, for the second month in a row
  • FOMC members are almost unanimous that a cut in rates can wait
  • Lagarde confirms that the ECB is prepared to “go it alone”
GBP – Market Commentary

Forecasting methodology to undergo a radical overhaul

Former Fed President Ben Bernanke has completed his review of the Bank of England’s inflation forecasting models. In a statement on Friday, the Bank’s Governor, Andrew Bailey, said that the review marked a once-in-a-generation opportunity to “upgrade our forecasting” and ensure that it is fit for purpose in an uncertain world.

It is understood that Bernanke made twelve recommendations for upgrades.

“The forecasting and policy challenges faced by the Bank of England in recent years were hardly unique. Still, they have served as a stress test of forecasting at the Bank,” Bernanke said. “The Bank, like other Central Banks and policy institutions, will be working to draw the appropriate lessons from this experience. The goal of this review is to assist in this effort.”

Bailey and his colleagues can expect their forecasting to be severely tested in the coming months as the growing threat to the economy from the worsening situation in the Middle East and the continued “stickiness” of domestic consumer price inflation.

Data published on Friday showed that the economy grew for the second month in February. While the Office for National Statistics will want to wait until the Data for March is released, the economy likely has already recovered from the recession it dipped into in December last year.

The cumulative level of growth achieved in the first two months of this year is 0.4%, hardly worthy of the accolades that the Prime Minister and Chancellor are giving themselves, but at least it is a “step in the right direction.”

The base rate of interest has remained unchanged since September last year. It is now believed that the series of hikes which began in December 2021 have now been fully absorbed into the economy and the risk of secondary inflation from wage increases linked to the rise in inflation has ended.

Although Andrew Bailey was very clear in a recent speech that headline inflation would not have to have fallen to the 2% target for rates to be cut as long as there was “sufficient progress” being made towards that goal, his words were sufficiently ambiguous to allow him “wiggle room” for just the situation that is being seen currently.

The Bank is now expected to cut rates by twenty-five basis points at its June meeting, but inflation will need to make further progress between now and then.

The pound made a steep fall versus the dollar, driven by the realization that the FOMC is not going to be hurried into making rate cuts before September at the earliest. It fell to a low of 1.2426 and closed at 1.2449.

Versus the Euro, it fared better since the ECB is still on course to cut in June. It rallied to 1.1726 and closed at 1.1699.

This week is going to see a heavy volume of economic data published, with employment figures due for release tomorrow, followed by inflation on Wednesday and retail sales on Friday.

USD – Market Commentary

A rate cut is an economic, not political decision

The worsening situation in the Middle East following Iran’s unprecedented attack on Israel threatens to derail the U.S. economy. It may well hasten the cuts in interest rates that have been continually “placed on the back burner” by the FOMC over the past few weeks.

The rise in inflation that took place in March, finally “woke up” the market into accepting that the hawkish comments by Neel Kashkari and Raphael Bostic, among others, held a genuine threat that the three rate cuts that were “slated” for this year may not happen at all.

There has been a significant increase in volatility with the Fed still being driven by the data, which continues to show that there is still significant price pressure in the economy driven by continued strong employment data and continued supply chain issues.

Jerome Powell has continually tried to avoid being influenced by the political “circus” that surrounds the two potential candidates expected to fight the presidential election later this year.

In a poll conducted recently, 70% of Americans do not want the election to be fought by one octogenarian and one septuagenarian, Joe Biden and Donald Trump.

Biden, who is facing the most telling period of his presidency in the coming weeks and months, has continued to look increasingly frail recently, having seemed to lose his train of thought when answering reporter’s questions.

His steadfast attitude to Israel’s continued bombardment of Gaza has been shaken by Iran’s attack on Israel over the weekend. Biden committed to continuing America’s “ironclad” support for its ally, although he told reporters that the U.S. won’t take part in any retaliatory strikes on Iran in the coming days.

The dollar index has been seeing significant buying interest over the past week as the FOMC has stepped back from making any cuts in interest rates before September. Indeed, it is unlikely that the three cuts that were slated to take place before year-end will be possible.

The index rallied to a high of 106.10, its highest level since the first week of November, and closed at 106.01. It is now in an overbought condition on short-term charts, so day traders can be expected to take profits on their positions, although the overall trend is still higher.

Retail Sales data for March is scheduled to be published later today. It is expected that the recent trend for stronger figures will continue, although it may have dipped from February’s 0.6 rise Month-on-Month.

EUR – Market Commentary

If the ECB cuts alone, the future looks bleak

The assertion from Christine Lagarde about the ECB being happy to “go it alone” in cutting interest rates in June condemned the Euro to a continuation of its fall that began with the publication of U.S. inflation data last week.

Her comments seemed to jar with those of fellow member of the Bank’s Governing Council Robert Holzmann, who, while commenting that the ECB was “preparing” to cut rates, cautioned against cutting ahead of the U.S. due to the risk of seeing a continuation of the steep fall in the value of the Euro that was already taking place due to the FOMC newly cautious attitude to rate cuts.

For most of the last year, it has been assumed that the guardians of the world’s two most important reserve currencies would move their rates more or less in sync with each other as inflation receded.

However, that changed last week.

The ECB gave its strongest sign yet on Thursday that in June it will start cutting its key deposit rate, which has stood at a record high of 4 percent since September.

Lagarde told a press conference held following the ECB’s decision to keep rates on hold at its latest meeting that “we are not Fed-dependent”.

She went on to say that a “handful” of members of the committee pressed for rates to be cut at once, but they were outvoted.

One of that minority was Yannis Stournaras, who said on Friday that it was time for the ECB to “decouple” monetary policy from the Fed. He went on to say that the ECB is being “too cautious” about monetary policy and is running the risk of driving inflation below its 2% target.

He believes that there should be four cuts in interest rates this year.

Before the next meeting of the Governing Council, the Executive Committee of the Central Bank will attend a “retreat” to be held in Ireland at which green policy will be discussed.

With the two-year fight against inflation now drawing to a close, the Bank will usher in a new phase during which it wants to be seen as supporting green initiatives as the overall economy moves towards new, sustainable, energy sources.

The euro slumped to a low of 1.0622 and closed at 1.0645 as it was assailed on two fronts. The hawkish comments of the FOMC. then the flight to safety, driven by events in the Middle East.

This week, harmonized inflation data is due for release. This is expected to be unchanged at 2.9%. The influential ZEW economic survey for Germany will also be published. This is expected to confirm that although the economy has not worsened recently, it is still “bumping along the bottom.”

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
12 Apr - 15 Apr 2024

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.