1 July 2024: GDP data may see the MPC concern


  • Economic performance provides a boost to Sunak
  • FOMC minutes and jobs data to add to volatility
  • The ECB may be forced to intervene following the French vote
GBP – Market Commentary

Inflation is still some way from being controlled

News that the economy grew at the fastest rate of any G7 country in the first quarter may well provide cold comfort for Rishu Sunak and his colleagues in the Conservative Party. Sunak has insisted that the country has “turned a corner” in the first half of the year but the government will likely “pay” for the past “sins” of others.

After fourteen years of cuts of public services in the name of austerity and several gaffes that have shown a considerable lack of judgement on behalf of members of the Party, including successive Prime Ministers, the electorate is almost certain to vote for the change that Labour Party leader Sir Keir Starmer has promised.

All that remains is for the size of the Labour majority to be confirmed following Thursday’s vote.

The recriminations that will probably see Sunak resign as Conservative Party leader sometime on Friday will be sprinkled with “if only”. The most obvious of which will be the timing of the election. If Sunak had shown better judgement and allowed the economy to improve while preparing for an Autumn election, he and his Party would have stood a better chance of victory.

As things stand, the Conservatives are predicted to turn an eighty-seat majority into a one-hundred-seat plus loss, with the possibility of Labour winning a “supermajority” or even being beaten into third place, although either the Liberal Democrats or Reform UK winning sufficient seats for that to happen is highly unlikely.

The MPC will meet next in a month to consider changing monetary policy. Although inflation is far from being controlled, the possibility of a cut in interest rates is growing.

Bank of England Governor, Andrew Bailey, has been sparing in the amount of advance guidance he offers the market during his first term in the role, but what he says tends to be remembered.

It is not always clear if that is a good thing.

He has been criticized for saying several months ago that the MPC won’t need to wait for inflation to fall to the Bank’s 2% target to begin to cut rates. His lack of clarity when making that statement has meant that even though the rate of price increases fell to 2% last month, the committee has failed to act.

In the past few days, he has said that every vote from now on will be “tight” despite the majority for leaving rates unchanged is still 7-2.

The pound is still reliant on rates staying unchanged to keep volatility in check.

Last week, it traded in a relatively narrow range between 1.2612 and 1.2702. There may be an increase in volatility driven by any significant surprise from the General Election, but overall, the path for Sterling is dependent on any changes to monetary policy.

USD – Market Commentary

Minutes will provide another clue to the Fed’s process

With imminent elections taking place on both sides of the English Channel this week. The U.S. has begun its preparations for what will be an extended run-up to the Presidential Election that is due to take place in November.

Last week’s initial showdown between the candidates, which was demanded by President Biden is now being considered to have been a considerable error of judgement from not only the President himself but also commentators who were shocked that his staff could have “allowed” him to appear before reporters when he was ill-prepared but also showing significant signs of old age.

Biden’s wife who remains his staunchest supporter has tried to “paper over the cracks”, but the issue is plain for all to see, and has seen senior democrats “scurrying around” trying to decide if they need to find a candidate to replace him.

Normally it would be his running mate who “steps up to the plate” but Vice President Kamala Harris is considered almost as unelectable as the President.

The most telling comment following Thursday’s debacle came from a member of Biden’s Cabinet, who labelled his performance as “disqualifying”.

This week, the market will be able to concentrate on the wait for an interest rate cut. Although recent meetings of the Federal Open Market Committee have been predictable, market participants are always interested in the minutes of those meetings, hoping to be able to distil some hidden message that will provide them with an accurate “read” on when the first cut will happen.

The minutes of the latest meeting will be published on Wednesday evening.

Since this is the first week of the new month, data on the jobs market is due for publication, culminating in the June Employment Report on Friday.

Before that, the JOLTS job opening report is due tomorrow, followed by Challenger job cuts on Wednesday.

The main event will see the market again anticipate a fall in the number of jobs created, but the headline non-farm payroll figure will remain as tough to predict as ever.

However, the Fed is more interested in wage growth as a sign that inflation is being brought under control. In May, earrings grew at an annual rate of 4.1%, although monthly figures saw a marginal fall.

There is expected to be an overall rise in the level of volatility as we enter the second half of the year, as political events and potential changes to monetary policy dominate the headlines.

Last week, the dollar index saw some support as the market came to terms with the likelihood that there may well be a single cut in rates this year, and this will happen in December. The index reached a high of 106.13, but perhaps significantly closed above its high from the previous week at 105.85.

A lot will depend on this week’s data, with any unexpected fall in job creation or average earnings prompting a sell-off.

EUR – Market Commentary

ECB is gathering in Portugal as storm clouds gather

The ECB is holding its annual “retreat” in Portugal this week as news that the far right in France has gained a substantial lead in the first round of voting in France.

Marine Le Pen and Jordan Bardella’s National Rally established a significant lead in the French election.

National Rally won around 34.5% of the vote, with the left New Popular Front in second place with 29%. President Emmanuel Macron’s Renaissance Party trails in third place with just 20.3%.

The second vote which happens next Sunday is fought by any candidates who won more than 12.5% of the vote in their constituency, while anyone who won more than 50% of the vote is automatically elected.

Given National Rally’s considerable lead, it would be a surprise if Bardella is not declared as the New Prime Minister early next week.

Such a result may send the markets into a “Trusslike” turmoil since his plans for the country’s budget and borrowing make the Truss/Kwarteng policy appear mild by comparison.

The ECB will be on high alert for any sign that ordinary market volatility turns disorderly.

So far Philip Lane, the ECB’s Chief Economist, has spoken of there being no need for any intervention, which despite its seeming regular use over the past few years is considered a last resort.

Handing power to the far right may precipitate a rapid acceleration of the sell-off that has been seen recently but Lane maintains that the ECB has both the mechanisms to avert any problems and the will to ensure that the market is “controlled”.

Last the pattern of disappointing data from Germain continued with it becoming apparent that consumers are beginning to become frustrated by the continued elevated level of inflation.

Retail sales plunged in May following encouraging data for the first quarter. The retail section of the influential IFO survey showed that retailers’ assessment dropped back into negative territory.

Although wages have risen, workers appear to be saving their money instead of spending it in the shops.

The euro has been under pressure from political concerns recently but held up quite well last week. It climbed to a high of 10747 last week and closed at 1.0713.

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.