- Accounting firms see a brighter future that forecast
- Dollar gains as Fed expected to hike in May
- Late 2022 saw surprising growth
Deposit guarantee scheme set to be bolstered
The fact that the country managed to dodge a recession last year is a significant indicator that better times are, although the cost of living crisis is holding back consumers from loosening the self-imposed shackles that have been imposed by rising energy and food prices.
Reaction to the IMF’s rather gloomy prediction that the economy would be the worst performing in the G20 this year fails to note that the miniscule increase in GDP this year needs very little to see it improve to a level which puts it on a par with the U.S. and Eurozone. Both are predicted to suffer recessions this year.
The Bank of England may have stumbled onto the most effective method of tightening monetary policy since it began to hike rates in December 2021.
Little and often has been the watchword of the Central Bank, while both the Fed and ECB have been far more aggressive.
Unemployment data for March will be published today. It is expected to show a further fall in the claimant count which has continuously fallen for several months.
The unemployment rate is expected to be unchanged at 3.7%, close to historical lows, while average earnings, whether bonus payments are included or not, continue to fall. Earnings are a major contributor to core inflation, and with price rises beginning to fall, real wages are set to rise.
The strikes that have blighted the economy since Autumn of last year are gradually being settled although the disputes over junior doctors and nurse’s pay is part of far wider systemic issues throughout the entire health service.
It is impossible to look at the country in isolation when it comes to comparing the currency. The pound is at its highest level for close to nine months versus the dollar, while against the common currency it remains close to the bottom of its long term range.
This is an indication of the market’s interest rates expectations with the Bank of England expected to call a halt to rate increase, while there remains uncertainty about the actions of the Federal Reserve, while the ECB remains the most hawkish Central Bank in the G7.
Yesterday, the pound lost ground versus the dollar as the Greenback continues to recover from its recent fall which appears to be overdone. It fell to a low of 1.2353 and closed at 1.2376.
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Barkin sees inflation falling back to target
Too much emphasis has been placed on the publication of an internal report prepared for the last FOMC meeting in which it was predicted that the turmoil that was created by the collapse of two regional banks would spill over into the wider economy and threaten money centre banks’ activities.
The Treasury has been keen to show its confidence to the market by praising the work that has been done since the financial crises of 200 and 2012 to ensure that banks have stronger capital structures in place, which significantly reduces the danger of contagion.
Banks are encouraged to have more individually based risk parameters when agreeing the level of interaction that they have with their trading partners. An overzealous approach may lead to contagion if one or more banks suffer, while a more conservative attitude to interbank lending can lead to a credit crunch.
The recent issue, which claimed one high profile victim in Credit Suisse, was considered to be a global issue rather than being confined to the Swiss or European market and the Central Bank response was more coordinated and rapid than has been seen in the past.
It remains a cliché that it always seems to be the next meeting of the FOMC that will be the most important but again the meeting in the first week of May is being built in that manner.
The days of jumbo rate increases are gone now and the fine-tuning of monetary policy has taken their place. If the FOMC votes for a rate increase, it is likely to be their last and be of twenty-five basis points.
Jerome Powell has to tread a fine line between confirming that tightening of monetary policy has ended while not being seen as too dovish, particularly while inflation is still well above the Fed’s target.
The dollar has recovered well from its recent correction which has seen the levels of support at 101.40 and 100.00 become even stronger.
Yesterday the index rose to a high of 102.22 and closed at 102.09. It will need a close above 102.40 to confirm its short-term direction.
Central Bank needs to make its own decisions
Although the recent, albeit violent, turmoil in the financial markets was short-lived and can now be considered at an end, the IMF feels that it serves as a warning to Central Banks that they must perform their own due diligence on banks who fall under their regulation and not rely on the banks own data.
There are two major issues that came to light recently and both apply to the Eurozone. First, there are several banks operating within the Eurozone which operate under more than one jurisdiction. It is unclear whether the ECB or their local Central Bank is their lender of last resort, and second, their statutory reporting requirements can become a little blurred.
Christine Lagarde reiterated her recent comments yesterday that inflation remains a major issue within the eurozone and despite several speeches to the contrary made recently it is unlikely to fall either unaided or as quickly as the ECB demands.
For this reason the ECB will continue to hike interest rates in the short term. She has coined a new phrase too, she is concerned about the considerable uncertainty which remains, and while there are differences between delegates at Governing Council meetings about the size of hikes, there is agreement about the continued direction of interest rates.
The balance of risks is currently almost equal, with factors on both sides that may slow the fall in inflation, while energy prices may see a continued slide.
The most significant driver of continued inflationary pressure is the rise in wage settlements, although there has been thankfully very little industrial unrest driven by wage demands.
By and large, the economic data that has been released lately has been encouraging. In a region so vast, there will always be pockets of over or underachievement, but overall, the Eurozone should not fall into recession this year.
The Euro has shied away from another attempt at the 1.10 level, although it remains supported from the more hawkish attitude of the ECB when compared to other G7 Central Banks. It fell to a low of 1.0909 yesterday and closed at 1.0925.
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Exchange rate movements:
17 Apr - 18 Apr 2023
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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.