15 November 2022: Sunak building credibility at G20

Sunak building credibility at G20

15th November: Highlights

  • Jet Set Sunak puts the financial statement in perspective
  • 75 bps hike more likely based on recent data
  • ECB Board member questions the need for restrictive rates,

GBP – UK sees itself as a vital member of extended group

Sunak has been building foreign policy bridges as he criss-crosses the globe before facing the arduous task of rebuilding confidence in the UK’s finances in concert with his chancellor, Jeremy Hunt.

Having renewed the country’s commitment to climate goals at the COP27 conference before jetting to Bali for G20. He strikes a far more business-like figure than Boris Johnson, whose amiable bonhomie never truly resonated with world leaders.

His primary goal in Bali will be to be part of a united front to condemn Russia and label it a rogue state.

When he arrives back in London on Thursday morning, Sunak will go straight to the House of Commons to support Hunt as he delivers the blueprint for the UK’s recovery from the recession and establishes measures to drive the economy forward in the post-Brexit period.

Various points from the plan are drip fed to friendly journalists to prepare people for the tax rises and spending cuts that are bound to be included.

Sir Keir Starmer led calls for the expected tax increases to be announced on Thursday to be aimed in the right direction.

He wants to see large corporate entities like Amazon and Facebook, who are, to all intents and purposes, domiciled in the country, but by use of several loopholes manage to pay a minimum of tax. He also believes in stricter regulation of non-doms, people who live in the UK but keep most of their earnings outside the country for tax purposes. This group contains Sunak’s wife, who is the heir to the Unisys Group, the Indian conglomerate which is owned by her father.

Unemployment data for October is due for release this morning. The unemployment rate is expected to remain at 3.5% despite the threat of recession hanging over the nation.

The Pound fell to a low of 1.1709 and closed at 1.1755. It seems that any attempt at resistance level of 1.1850 will have to wait until after the verdict is delivered on the financial statement.

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USD – Falling inflation and strong employment make hike likely

It seems that the next meeting of the FOMC is always the most important in the currency cycle.

A few months ago, it was expected that the December meeting would be the one where the Fed looked at the effect of its actions and decided whether the time had come to taper the sizable rate hikes that it has agreed so far.

With inflation appearing to be trending lower while the employment market remains hot FOMC members are keeping their cards close to their chests. There are no real indications from either hawkish or dovish members of the view on a pause in hikes, while, despite his silence on the subject, Jerome Powell is assumed to favour at least one more hike while the data still is supportive.

President Biden, basking in the glow of having dodged a bullet over the results of the midterms, which went just about as well as they could, given the position the President found himself as the country still teeters on the brink of a recession and the Republicans driven on by ex-president Trump, were baying for blood.

Biden now finds himself in Bali, where he met Chinese President Xi Jinping, fresh from his own success at the latest Communist Party Conference, where he clearly solidified his position.

The conversation between the two world leaders centred around the treatment of Taiwan. China considers it a rebellious state, while the US sees it as a wholly independent nation.

It has been a situation that has recently soured relations between the two superpowers, and both made veiled threats about the other’s possible escalation of their position.

While the two rattle sabres, they understand the importance of their relationship. China must sell its goods to the US to support growth in its economy, while the US, having exported its manufacturing ability to Asia in general and China in particular, has little alternative to continue to buy from its great rival.

The Dollar recovered from its recent falls as the euphoria of the Russian withdrawal from Kherson faded. It climbed to a high of 107.26 and closed at 106.88.

EUR – The overriding view of the majority is to leave rates alone

It is believed that no matter the proclivities of the individual members of the General Council of the European Central Bank, the overall view of the group, is that it should provide support to the economies of its weaker affiliates.

This is a situation that has existed almost for as long as the ECB has been in operation, but the current crisis that threatens to engulf the Eurozone must encourage complete reversal of its position.

As interest rates have been increased by three hundred and fifty basis points over the past three meetings, it has been done in an almost apologetic manner.

As the level reaches the neutral point where it is neither accommodative nor restrictive, a decision needs to be made about how much further they need to go, and this is where they will need to decide if there is sufficient flexibility in their fundamental attitudes for this to happen.

There are already calls for the ECB to rein in its hikes since they are threatening the entire stability of the Eurozone. While others, including it seems the Central Bank’s President Christine Lagarde, feel that high and rising inflation is the most significant issue the ECB has ever faced.

Since its inception, the ECB has been able to stimulate the economy by holding interest rates at low levels. This encouraged public spending in several nations that were used to high interest rates and high inflation, which created boom bust conditions and precipitated the financial crisis where these nations needed to be bailed out.

The effect of the Pandemic, while different in the way it brought about the situation, had a similar effect, and instead of needing to bail out the weaker economies, the ECB now must fight rising inflation.

It seems that until the war in Ukraine is over, and energy price levels stabilise, inflation will continue to be a major issue for the Eurozone. Data shows that the economy is heading for a recession as interest rates continue to rise, but unless the ECB becomes more hawkish on inflation, the issue will continue.

The euro has had its day in the sun, rising well above parity to test the outer reaches of its rage. It fell yesterday to a low of 1.0271 but recovered to close at 1.0328.

Have a great day!

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.