18 July 2023: First predictions see BoE hiking by fifty basis points

18 July 2023: First predictions see BoE hiking by fifty basis points


  • The UK economy is expected to fall further behind the Eurozone in the coming years
  • A UPS strike is a major concern for the U.S. economy
  • Food shortage fears grow as Russia pulls out of the Black Sea grain deal
GBP – Market Commentary

Can we believe Bailey’s assertion that the economy can cope with higher rates

Not only will inflation remain well above the Government’s 2% target until after the General Election, but a new survey shows that the UK economy will lag well behind that of the Eurozone. The survey predicts that UK GDP next year will be a paltry 0.6%, well below the Eurozone, which is expected to emerge from the shallow recession it is currency experiencing growth of 1%.

While it is both pointless and of no benefit to compare rates of growth between nations, those who advocate the UK trying to forge greater links with the Eurozone will say that not only is the disparity due to Brexit, but the UK will continue to underperform until it has forged free trade alliances with several large trading nations and blocs which could take up to ten years.

Participants in the survey do not believe that the UK will suffer a recession this year or next, there is a feeling that there is a “general malaise” descending over the country which will see the economy stagnate. This will do little to improve Rishi Sunak’s chances of pulling off a miracle by gaining a majority in the election which has to take place before January 2025.

The survey which polled the CFOs of some of the UK’s largest companies showed that 10% more believe that the economy will experience below trend growth next year than those polled in the previous three months.

Both major political parties are putting the economy at the centre of their election campaigns. The Government is struggling to make headway while the Bank of England is continuing to hike rates to tackle stubbornly high rate of headline inflation. However, the CFOs polled believe remain suspicious about the policies of the Labour Party, who have concentrated to criticizing the Government and haven’t yet put forward concrete proposals for how they would improve things.

They have been careful not to side too strongly with striking public sector workers who have demanded inflation busting pay awards.

Former Prime Minister Tony Blair who has been working behind the scenes to make Sir Keir Starmer more “electable” believes that the UK is now too weak to be able to reapply to join the European Union, even on a “Swiss style” arrangement where it contributes to the EU budget in return for access to the single market.

The only clearly defined policy that the Labour Party has announced is the relaxation of immigration restrictions to allow more unskilled workers to enter the country.

Headline inflation is expected to fall to 8.2% from 8.7% when the data is published tomorrow, while core price rises are expected to remain at 7.1%.

The Bank of England will almost certainly announce another rate increase on August 4th and the odds favour another fifty-basis point hike.

The recent increase in the value of Sterling paused yesterday with the pound falling to a low of 1.3051 and closing at 1.3073. Any suggestion that the cycle of rate hikes could end soon will see Sterling lose ground very rapidly.

USD – Market Commentary

James Bullard, one of the FOMC’s most hawkish members, steps down

Although inflation in the U.S. is falling ever closer to the Federal Reserve’s target of 2% which is increasing the chances that the economy will achieve the “fabled” soft landing, where higher rates which decrease demand, but the economy avoids a recession, there are still several clouds facing the country before it can claim to have inflation beaten, while the threat of a recession becomes almost zero.

One such problem is the threatened strike by UPS delivery drivers. The company employs almost 350k drivers for its service which has not only become the backbone of the increase in shopping from home but has become a verb in the U.S. language.

The drivers who are represented by the Teamsters’ union have given a deadline of August 1st to reach an agreement with employers, otherwise there could be a potentially, highly damaging, strike which would disrupt supply chains again when they have only in the past few months returned to normal following the Pandemic.

UPS delivers more than twenty-five million packages per day and its main rivals, DHL, FedEx, and The U.S. Postal Service have nowhere near the capacity to “take up the slack.”

Even a relatively short strike lasting ten days would cost the economy close to ten billion dollars and would be the most expensive industrial action so far this century.

The knock-on effect of a strike on items like medical supplies and car parts could bring the threat of a recession, but that would only be the case if a strike dragged on for at least a month, which is unlikely.

Goldman Sachs, the preeminent Investment Bank, sees the potential for a recession still at 20%, although that level is concern is higher than other firms and agencies. They cite the slowdown that the Chinese economy is currently experiencing as a worrying development for the U.S.

Janet Yellen, the Treasury Secretary, who met with the Chinese counterpart recently dismissed concerns about a recession in China. She believes that although China is vital as a supplier of bulk items to the U.S., any long recession in the Eurozone could potentially be more damaging given the high value items they import from America.

Yesterday, the Dollar Index halted its slide that was in danger of becoming a damaging trend. It rose to a high of 100.18 and closed at 99.90.

While there is even a tiny possibility that the FOMC will continue its pause in rate hike the dollar will remain under pressure.

EUR – Market Commentary

Rates to hit 4% before reaching a restrictive phase

Opening a conference about economic developments in Central and Southern Europe yesterday, the ECB President, Christine Lagarde appeared to relish an escape, however brief, from the constant stream of questions she must field about rate increases in the Eurozone.

She spoke of the need to see more convergence in the economies of the region, which she believes is one of the main purposes of Monetary Union.

She came close to acknowledging the possible mistake that had been made in pressing ahead with Monetary Union while individual nations continue to decide their own levels of taxation and social care.

Lagarde expressed her concern about the continuing hostilities in Ukraine and acknowledged that inflation remains “too high”, although she left her view that rates need to continue to rise for another day.

Since the financial crisis, trade growth as a percentage of world GDP has plateaued, with countries using rising levels of protectionism to defend their own economies and shield themselves from supply chain difficulties.

The global economy has recovered well from the Pandemic and that is a testament to the joint effects that were made in developing and distributing a viable vaccination. The difficulties in supply of the vaccine were short-lived, she said, quickly glossing over the unseemly “discussions” that took place over where and who should receive it first.

She went on to congratulate the nations of Central and Southern Europe for the resilience they have shown in the face of significant shortages they have faced in the supply of basic foodstuffs.

Russia yesterday pulled out of the agreement it had signed to end the blockade of Black Sea Ports.

A UK foreign Office Spokesman accused Vladimir Putin of using food as a weapon, and condemned Russia for preventing grain from reaching those who need it most. He went on to call upon Russia to reinstate the Black Sea Grain Initiative and commit to its full implementation.

The food shortage will quickly become catastrophic if grain supplies aren’t allowed to leave Black Sea Ports, since there is no alternative to the amount of grain that is shipped from there.

Yesterday, the Euro barely paused for breath following its monumental rise last week. It reached a high of 1.1248 and closed at 1.1235.

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.