- UK seeks energy independence
- Most economists believe that the economy is both healthy and resilient
- CPI remains unchanged
Inflation and interest rates beginning to bite
It had been agreed that for countries to meet zero carbon targets by their agreed time that existing supplies should be mothballed, and a greater concentration would be given to sustainable sources of power.
Rishi Sunak, who had already invited the ire of the environmental lobby by pushing back against the Mayor of London’s plan to extend the ultra-low-emissions-zone around London, has been accused of a “desperate vote-winning policy” to kick-start the Government’s campaign to win the next General Election for which they are trailing far behind the Opposition the opinion polls.
Data released yesterday showed that consumer lending rose to a five-year high last month. However, while this would be a sign of a growing economy in normal circumstances, it appears that rather than buying new cars or consumer goods, households are borrowing to supplement their funding of household budgets in the face of a continuing cost-of-living crisis.
The continued hiking of rates by the Bank of England, coupled with continued high inflation, is seeing monthly payments on loans, overdrafts and credit cards reach their highest level in a generation.
There was better news on the economic front as figures released yesterday showed that store prices dipped for the first time in two years last month. A possible sign that, at last, the headline rate of inflation has peaked and is beginning to respond to the new, more hawkish stance of the Central Bank.
Such is the level of confidence engendered by the Bank’s latest actions that there would be little surprise if the MPC repeated its policy action from last month and hiked rates by fifty basis points.
Today sees the beginning of the traditional lull in market activity as the market takes its annual holidays. While liquidity often dries up at this time of year, any significant market-moving data can sometimes be magnified, which leads to increased volatility.
Sterling began the week on the back foot against the dollar as the Q2 growth data in the U.S. continued to ripple through the market.
The pound fell to a low of 1.2825 and closed at 1.2835.
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Long-term forecasts still see a recession of sorts
A poll conducted by the New York Times showed that Trump dominates the Republican Party to such an extent that he holds a lead of thirty-seven points over his only serious rival.
While the thought of another four years of Trump rule will send shivers through Democrat voters, it is becoming increasingly likely that unless there is a significant shift on both sides of the electoral landscape, President Biden will again face off against his predecessor next November.
After a difficult year since last summer, the market is finally accepting the fact that the Federal Reserve has performed something of an economic miracle in bringing inflation back to close to its 2% target without “trashing” the economy.
Unless there are hidden surprises in the data due for release this Friday and on August 10th, the commentators who saw a recession “just around the next corner” will have to change their tune.
It is expected that FOMC members will break their silence over the next week to ten days to express their views on the return to hikes after a one-month pause and what the final three meetings of the year may hold.
Over the period of interest rates initiated by the Fed since last Spring, there has been a consistent feeling that decisions to hike rates have been taken at a pace which is designed to “get the job done before higher rates cause the public to lose faith in the process”.
Besides the increases in their home loans and other household debt, a significant majority of Americans still hold the Central Bank in High regard. Even the failure of three regional banks earlier this year, for which the Fed officials shouldered at least part of the responsibility, has failed to dampen support, probably due in no small part to the fact that it acted swiftly, and no deposits were lost.
When July inflation data is published next week, it is expected to be “knocking on the door” of the FOMC’s target of 2%, and it is hoped will enable the Fed to act more sparingly in tightening monetary policy further.
The dollar index is still struggling to break through the selling interest that it has run into above the 102 level, although it seems to be gathering momentum to another move higher.
Yesterday, it reached a high of 101.90 and closed at 101.88. Its highest close in three weeks.
Lagarde believes that Central Bank has been right to carat on hiking rates despite economy
It is believed that the ECB was “last to the party” since it didn’t begin to tighten monetary policy until July of last year and has hiked on nine separate occasions.
In the past, there have been emergency rate hikes as well as rate cuts, but even though the members of the ECB Governing Council remain hawkish, it has not felt the need to resort to such actions.
According to data released yesterday by Eurostat, inflation remains a significant issue for the Central Bank. Preliminary data for July show that headline inflation remained unchanged at 5.5% year-on-year, although there was a marginal dip month-on-month.
As things stand, there remains certain that rates will be hiked at the September meeting, since there will need to be a significant shift in the outlook for the ECB to pause, having travelled so far down the road.
There was better news on the economic front, as a growth of 0.3% was recorded in the second quarter.
The twenty economies of the Eurozone have reacted to raised inflation in a variety of ways. In the nations that had high inflation before the monetary union came into being, it is still treated as a fact of life, while in Germany and Austria, countries that see far greater savings rates than, say, Spain and Portugal and less state support, high inflation is viewed as a major threat to their very existence.
While this is an improvement of the flatline of the first quarter, growth remains hard to come by and is still way below the level it was prior to the energy price shock and the Russian invasion of Ukraine.
The latter shows no sign of abating, with Russia being forced to intercept and destroy three drones over Moscow yesterday.
Ukrainian President Zelensky commented that his country can move the focus of the war to Russian soil.
It is impossible to gauge the feelings of ordinary Russians towards the war since there remains a virtual news blackout about the war in Russian media.
The Euro is beginning to lose ground against the dollar despite the preliminary inflation data pointing to further rate increases.
It fell to a low of 1.0993 yesterday, closing at 1.0995.
Have a great day!
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31 Jul - 01 Aug 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.