15 December 2022: Headline inflation falls to 10.7%


  • Bailey warns against excess deregulation
  • Fed maintains tightening bias
  • Industrial Production falters as demand falls
GBP – Market Commentary

Core inflation falls by 0.2%

The Bank of England’s Monetary Policy Committee will conclude its final meeting of the year later this morning, having raised short-term interest rates at every meeting in a year that has seen inflation continue to rise to a level that has not been seen in a generation.

The Economy has been hit with a perfect storm of factors that have often been out of the control of the Central Bank, but history will decide if the actions that have been taken have been sufficient.

The exponential increase in the wholesale price of gas, the war in Ukraine and shortages of several basic foodstuffs have seen inflation test the mettle of the committee members, some of whom, in spite of raging inflation, have shown misplaced concern about the effect of higher rates on economic growth.

The replacement of arch inflation-hawk Michael Saunders with the clearly more dovish Swati Dhingra, has changed the market’s perception of the seriousness of the Committee’s inflation fighting credentials.

In the two meetings that have been held that she has participated in, she has voted for a hike in rates that is lower than what has finally been agreed.

Her public comments about rising prices have shown that her concern is more about growth than inflation.

Andrew Bailey, the Central Bank’s Governor, has acknowledged that he expects the economy to contract for five consecutive quarters commencing with the current one.

While it is acknowledged that different points of view are important in creating the most appropriate conditions for the economy, such public displays of disunity must weaken the market’s overall perception.

Yesterday saw the release of the November inflation report, and although the headline figure fell, it is way too early to expect this to be the start of a trend.

Significantly lower fuel prices were offset by increases in the cost of basic foodstuffs, and it is yet to be seen if the price cap introduced on EU oil imports from Russia will have any effect on the oil price, which dropped below $80 a barrel recently.

The MPC is expected to hike by fifty basis points later today, which will see short-term rates reach well into restrictive territory, which should extend their effect on both growth and inflation.

The pound saw its sixth consecutive close. It reached a high of 1.2446 and closed at 1.2423.

USD – Market Commentary

Fed to maintain a sufficiently restrictive stance

The market engaged in a dangerous precedent this week by second guessing the actions of the FOMC. In the past, such predictions have been seen to blow up in people’s faces, but it is possible that the current Chairman of the Central Bank is far more pragmatic in his advance guidance than his predecessors.

Despite having made his most dovish comments on interest rates and inflation since the spring, there was a whiff of concern that Jerome Powell would side with the hawks and sanction and other jumbo hike of Seventy-five points.

In the end, rates were hiked by fifty basis points, as the market had concluded would be the case.

The fed funds rate has now entered far more into restrictive territory than had been expected in the summer, when a recession was considered to be more than likely.

With inflation now appearing to trend lower, the FOMC seems to want to press home its advantage by targeting the 5% area, with rates unlikely to fall in 2023.

In his press conference following the rate decision, Powell reiterated that the ongoing interest rate increases will be appropriate to attain a sufficiently restrictive policy stance. The committee will take into account the effect of cumulative tightening, policy lags and economic and financial developments, in setting the pace of subsequent rate hikes.

At the end of January, when the next meeting takes place, the market will have a fair idea what to expect but will still be a little nervous that there could be a surprise.

A lot will depend on the employment market, which has added jobs at a rate that continues to baffle observers. It is mainly due to the amount of time that the Fed was raising rates before they became restrictive. The December data will most likely carry a greater significance than what has been seen throughout the fourth quarter.

The dollar index continued its recent correction yesterday, as its attention will now be drawn to the economy and the now less than even chance that there will be a recession in 2023. It fell to a low 103.43 and closed at 103.62

EUR – Market Commentary

A 50 bp hike is on the cards!

Another day, another set of data that adds to an already confused picture of the outlook for the Eurozone economy.

It seems that for more than a week, each day has brought numbers that either confirm that the economy is heading for a serious downturn, or it will be a mild recession or that several countries will barely notice.

In the midst of this confusion, the ECN is meeting today to set short-term interest rates. It is expected that rates will be raised by fifty basis points.

With inflation falling but now seemingly in a downtrend, there will be calls for a twenty-five-point hike, just as some of the more hawkish members want seventy-five basis points, to emphasize how serious they are in their war on inflation, but the majority will decide on fifty.

The main refinancing rate will be hiked to 2.5% which will border upon restrictive, although with rates in the eurozone having been lower historically than in other G7 nations, this will certainly dampen demand.

There are several observers who see a recession being cast in stone by another interest rates, but with very few members of the Eurozone experiencing inflation at what is considered average, and levels of growth that confound pessimism, fifty basis points are seen as a compromise worth taking.

At the end of this week, many market participants may well expect the holiday season to begin, but there are still several potential issues that could add to volatility due to a lack of liquidity.

While there are no category A data releases next week, the euro is trading at levels that are dangerous and given the lack of follow through that has been seen that should have led to strength in its own right, the single currency could be prone to a correction.

Yesterday, the euro reached a high of 1.0695, another high for the second half of the year, and closed at 1.0679. It may begin to drift until the New Year, but the current continual fresh high appears to be little more than a castle built on sand.

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.