1 December 2023: The BoE and Government have widely different agendas

1 December 2023: The BoE and Government have widely different agendas


  • UK escapes the worst of the slowdown in major economies
  • The U.S. economy has slowed marginally in Q4
  • Eurozone inflation falls to 2.4%
GBP – Market Commentary

A rift is developing over monetary versus fiscal policy

The comment made recently by Bank of England Governor, Andrew Bailey, where he suggested that the UK economy had the least potential for growth that he had known during his working life, betrays a belief that has been held by many observers for some time.

It seems that the permanent members of the Monetary Policy Committee do not understand that the committee has a dual role, to not only use interest rates to keep inflation at or close to the 2% target which has been set by the Treasury, but to also promote growth and employment.

For some time, possibly since it gained independence, the Bank has not really had a part to play in promoting growth and in the ten or so years prior to the Pandemic when inflation was low it became almost redundant.

Now, when the market is looking to the Bank to contribute, it is left almost entirely to the independent members of the committee to show concern for the economy.

Huw Pill, the Bank’s Chief Economist, speaks of his view on inflation when considering when the first rate cut may take place, without taking into consideration the lowering of growth expectations that have been published by the OBR, and latterly the OECD.

While Bailey may well be disappointed with Government fiscal policy, he should perhaps be looking a little closer to home to see what the Bank’s role in declining GDP has been.

It remains to be seen whether the recent falls in inflation may be considered structural and sustainable, but the Bank should have been more proactive in considering if it was able to pause its cycle of rate hikes sooner. Even if they had been forced to return to that policy later, it would have shown a level of teamwork with the Treasury that has obviously been lacking.

Jeremy Hunt has been publicly vociferous in his support for the MPC’s decision-making, but it may be that in private he is disappointed that it saw fit to continue the cycle of rate hikes for more than eighteen months, keeping the incremental size of the hikes constant.

Next week will see the first of the output surveys for November published. It is likely that the composite index of manufacturing and services output will just about show expansion, but it is likely to be close.

The pound appears to have begun the retracement of its recent gains, having seen its second consecutive day of losses. It fell to a low of 1.2603 yesterday and closed at 1.2623.

Short term support is at around 1.2540 and that may well be tested in the coming days.

USD – Market Commentary

PCE falls to 3% as expected

Jerome Powell has left it to his FOMC colleagues to confirm that interest rates have peaked. It may be that the Fed Chairman shares their view, but he remains unlikely to share that with the public.

New York Fed President, John Williams, noted the recent improvement in supply chains, which has reduced a bottleneck in demand and eased price pressures. He believes that this means that rates have peaked.

Since there is no way that the Fed will categorically say that rate hikes have ended, and still is non-committal about the next move in rates being a cut, that is about as dovish a comment that can be hoped for by the market.

Treasury Secretary, Janet Yellen, is no stranger to the pressures that come with the role of Fed Chairman, spoke yesterday of her view that the economy is “on track” and does not need further drastic monetary policy tightening to stamp out nascent inflationary concerns.

Yellen was on a visit to a plant that will supply batteries for the planned surge in electric vehicles. Given the long history that the country has with gas guzzling vehicles with larger than necessary engines, it will take a leap of faith as big as the reduction of the speed limit to 70 MPH which took place in the seventies, for the country to make the switch.

Yellen was promoting President Biden’s $210 billion green energy initiative, which may be a vote winner amongst more aware younger voters but will have negligible effect on traditional Trump supporters.

Yellen went on to say that the economy still is on course for a soft landing, with no immediate signs of a recession.

While inflation, as shown by the fall in personal consumption expenditures, is on the retreat, the Fed will be able to maintain its current stance.

Next week will see the publication of the November employment report. There are few commentators willing to predict anything other than a fall in the headline number from the 150k new jobs created in October.

If the figure for new jobs created is around that level or marginally lower, and the CPI data, due the following week, is in line with the PCE report, then Jerome Powell may be in a position that confirms that a soft landing has been achieved.

The dollar index continues to make up ground it has lost over the past few weeks. Yesterday, it rallied to a high of 103.59 and closed at 103.50.

With monetary policy in what may be considered a neutral state and data continuing to confirm a soft landing, the dollar is likely to remain well-supported into the year-end.

EUR – Market Commentary

Inflation fall predicts an early rate cut

Inflation in the Eurozone is falling even more quickly than the Governing Council may have hoped. Yesterday’s publication of data for October showed that headline inflation in the region fell to 2.4%, while core inflation fell to 3.6%.

This means that prices are falling at a rate far greater than the ECB had expected and illustrates the folly of Christine Lagarde’s prediction that rates will stay at their current level until at least the middle of next year.

If inflation continues to fall, and that is by no means certain given the pressures that are on energy prices at this time of year, the market can reasonably expect to see a rate cut by the end of the first quarter.

Given the output data that has been released for October and the cuts that have been seen in predicted growth for both this year and next, even as hawkish a group as the Bank’s Governing Council will hopefully see the merit in a rate cut.

The financial markets certainly feel that a rate cut has become more likely in the past few weeks, and the inflation data released yesterday will have done nothing to cool their expectations.

Christine Lagarde and Spanish Central Bank Governor, Pablo Hernández de Cos, are due to make speeches later today and both are certain to be questioned about the possibility of a rate cut.

Spanish inflation has fallen the most by any Eurozone member recently, and it is expected that de Cos will be slightly more dovish than the more conservative Lagarde who will always want to see one more month’s data to be certain.

With inflation falling and employment still producing healthy numbers, Eurostat published a report yesterday that predicts that the Eurozone can still achieve a soft landing, possibly as soon as Spring next year.

Despite the data for unemployment being unreliable at best, with inflation tumbling a “technical” soft landing will provide the ECB with some confidence that its policy actions have been proven to be correct.

Next week, output and retail sales data are due for release. If the ECB needed any further encouragement to see that a rate cut is called for, the data should provide it.

The euro fell sharply yesterday as traders sold, having missed the move above 1.10 to establish fresh short positions.

It fell to a low of 1.0879 and closed at 1.0885. Short term support is at between 1.0840 and 1.0820 and a test of that area is now likely.

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.