17 January 2024: Jobless rate unchanged at 4.2%


  • Average earnings continue to fall
  • IMF believes that the economy has already seen 75% of the effect of rate hikes
  • The German economy is “dragging the eurozone economy down” with it
GBP – Market Commentary

Fall in wage increases points to a cut in rates by Spring

Yesterday’s publication of employment data for the three months to November showed a significant fall in average earnings, which will have supplied encouragement to those who see the Bank of England cutting interest rates sometime during this quarter.

Wages rose by 6.6% between September and November from 7.2% in the three months to October. There was also a significant fall in the claimant count for November, revised close to almost unchanged, while there were 11.7k new claimants in December.

The market will be keenly awaiting this morning’s release of inflation figures for December, as the pressure begins to rise on the Bank of England to cut interest rates from their highest level for fourteen years.

While the rise in wages was still close to double the pre-pandemic rate of 3.8% it represents a significant improvement as interest rate hikes continue to influence demand and the number of available jobs diminishes.

The hawkish members of the Monetary Policy Committee will still be concerned about the level of wage growth and are unlikely to vote for a cut until even more progress has been made.

Three of the four independent members of the committee have a more hawkish view on interest rates than the five permanent members. Comments made by Catherine Mann and Megan Greene recently illustrate their view that far from there being cuts, the Bank should still be in “tightening mode”.

Swati Dhingra is less of a hawk and stands for a more moderate view of the economy. She is concerned that another rate increase, adding another burden on the lowest paid, would be counterproductive given the recent fall in inflation, but she is also not ready to vote for a cut in rates yet.

The pressure being exerted by the market is not so far having too much effect on Andrew Bailey, he has been conspicuous by his absence since the turn of the year, making very few public comments on the state of the economy.

Sixty conservative MPs rebelled against the Government last evening in a vote over the Bill to send asylum seekers to Rwanda. The rebels. Including former ministers, Suella Braverman and Robert Jenrick, want amendments made to the proposed legislation to “toughen it up”.

While the Government is expected to win a vote to pass the Bill in its current state later today, the rebellion further weakens Rishi Sunak’s position, something he can ill-afford in an election year.

The pound fell against the dollar as the market switched into “risk-averse mode” following a further escalation of violence in the Red Sea.

Sterling fell to a low of 1.2619 and closed at 1.2630 as the market finally experienced its first significant increase in volatility of the New Year.

USD – Market Commentary

Fed Governor Waller believes that the inflation goal is “within striking distance”

In its first communication of the New Year, the IMF issued a report yesterday, in which it commented that the legacy of interest rate hikes that are still affecting demand in the U.S. Economy is 75% complete.

This is a veiled belief that rates can be cut between now and the end of the second quarter as they will have been in a restrictive state for six months, which will have introduced equilibrium into the economy.

U.S. equity markets have continued their bullish outlook so far in 2024, still being close to all-time highs, although they are just beginning to run out of momentum, which may signal a mild correction.

There was renewed hostility in the Red Sea yesterday as a U.S. owned cargo vessel was hit by missiles launched from inside Yemen. This is a clear reminder to U.S. forces that the air strikes delivered by U.S. and UK forces last week have not yet had any significant effect on Houthi aggression.

The continued attacks on the interests of those nations considered by the rebels to be supporting Israel’s attacks on Hamas in Gaza represent a significant threat to most of the economies in the developed world, and as such have increased support for the dollar, which tends to “do well” in times of heightened concern.

The race for the White House got underway officially yesterday, with the Republican Party holding a caucus in Iowa to ask registered supporters who they wish to be their Party’s Candidate in November’s Presidential Election.

The outcome was a resounding victory for former President, Donald Trump, who left his opponents trailing far behind as he gained more than fifty per cent of the vote.

While the outcome wasn’t a great surprise, such a result in the next vote, in New Hampshire, will almost certainly make Trump appear unassailable.

There will be a “health check” on the U.S. economy delivered later today, with the release of retail sales data for December, as well as industrial production figures.

The growth that was seen in the final two quarters of 2023 was almost entirely due to increases in retail sales, and December’s data is expected to carry on that trend.

Sales volumes are expected to have grown by 0.4% month-on-month, after a 0.3% rise in November. Industrial Production is likely to have been flat, which will add to calls for rate cuts to begin.

The dollar index rallied to a high of 103.42 yesterday, its highest level of the year so far, and closed at 103.34. The next upside target is around the 104.25 level and given the Fed’s continued reluctance to conform with the market’s demand for rate cuts, which is eminently achievable.

EUR – Market Commentary

Lagarde sees Trump as a clear threat to Europe

In a speech delivered over the weekend, ECB President, Christine Lagarde, voiced her concerns over the re-election of Donald Trump as U.S. president and the effect it will have on global stability.

Given the volatility that has been caused over a significant period by Russia’s continued aggression in Ukraine and more recently Israel’s efforts to subdue Hamas together with attacks on shipping in the Red Sea by Houthi Rebels in Yemen, Trump’s rhetoric could see an escalation with Iran becoming part of the ongoing conflict.

However, Lagarde’s remarks were about a trade war since when he was President before, Trump favoured protectionist policies and promoted the benefits of placing tariffs on imports into the U.S. in particular on goods manufactured in the EU.

With the U.S. running a large trade deficit, any threats of “tit-for-tat” measures will have only minimal effect.

Former Portuguese Minister of Finance and current Governor of the Bank of Portugal, and member of the ECB’s Governing Council, Mario Centeno spoke yesterday of the dangers of Eurozone inflation undershooting its 2% target. His comments confirmed his openness to interest rate cuts happening “sooner rather than later” a view that is gaining marginal traction despite the open antipathy of ECB hawks.

The Eurozone has been struggling for growth for more than a year, and the current quarter is expected to be especially challenging. The growth in consumer prices has surprised to the downside “quite a bit”, and the aim is to see 2% inflation in the midterm, not in February or in March.

Italian Central Bank Governor, Fabio Panetta, will certainly follow Centeno’s lead, but support for a rate cut this quarter is still not heavily supported.

The words of Austrian, Robert Holzmann earlier this week, backed up by a slightly less hawkish outlook from Bundesbank President, Joachim Nagel, both of whom believe that concessions have been made by halting the cycle of rate hike are likely to hold sway at forthcoming Governing Council meetings.

The Euro lost ground as the market reacted to increased risk aversion. It fell to its lowest level since mid-December, and the 1.10 level looks a long way away. It fell to a low of 1.0862 and closed at 1.0871.

Confirmation of the rate of inflation for December will be published and while the rise in prices is slowing down, no one at the ECB expects the fall to be linear, so an unchanged result will not create any alarms.

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.