20 February 2023: The Brexit effect is a major issue

20 February 2023: The Brexit effect is a major issue


  • Disagreement emerges about strength of the economy
  • No landing is the latest buzzword
  • Output data is expected to have improved in February
GBP – Market Commentary

Government not taking advantage of trade opportunities

There is a distinct and significant difference of opinion beginning to emerge about the strength, or otherwise, of the British economy going forward, economists rarely agree about the future direction of an economy but to see such fundamental differences is unusual.

Given that the Government is so far behind the opposition in opinion polls, some feel that the change of direction that an election would bring is just the shot in the arm the country needs, while others believe that and election victory for a Labour Party that is so clearly devoid of fresh ideas would simply bring more of the same.

For example, there has been no clear indication about how a Labour Government would deal with the wave of industrial unrest that threatens to engulf the incumbent Government. Past Labour leaders would have supported low paid public sector employees in their quest to receive what the Left considers to be a fair living wage.

However, as the Labour Party leader continues to purge hard core left wing members from the Party, the latest example of which is the confirmation that former leader, Jeremy Corby, will not be allowed to stand at the next General Election as an official Labour Party candidate.

It appears that the identity crisis that has grown in the ranks of opposition MPs means that the old-fashioned ideals of socialism, if retained, mean that the Labour Party has become unelectable. Trying to regain the middle ground that was so successfully nurtured by Tony Blair twenty years ago will bring a socialist lite form of Government that will retain several of the more moderate policies of the current Government.

There appears to have been agreement between the Government and the EU over the changes that have been proposed to the Northern Ireland Protocol that currently means that for customs purposes means that Northern Ireland remains part of the Union.

The proposed changes are not acceptable to unionists in Belfast, who are loyal to London, and means that they continue to refuse to join a power-sharing agreement in which the First Minister will be from a Party that supports Dublin and the unification of the island of Ireland.

Rishi Sunak faces a difficult task convincing all parties to agree, although all sides are keen to move on from a subject that has become a significant barrier to future trade relationships.

Last week, Sterling remained at the lower end of its recent range as the inflation data led the market to first consider the end of the Bank of England’s cycle of rate hikes and then decide what other supports the currency will have to lean on if the support of higher interest rates disappears.

The pound was virtually unchanged over the past two weeks. Last week it fell to a low of 1.1915 and closed at 1.2043, an almost identical range the previous week.

Data for services output is due for release tomorrow. This is likely to show a marginal fall from 48.7 to 48.3 as activity remains in contraction. That is the only tier one data due for release in the UK this week, and means that the pound will be driven by events elsewhere.

USD – Market Commentary

Is the Fed considering a step back or a step up?

The minutes of the latest meeting of the FOMC will be published on Wednesday. Their release will likely prove to be something of a distraction to the financial markets that have become more than a little unsure of the future direction of interest rates.

Traders and analysts have decided for themselves that the Fed is likely to end its cycle of interest rate hike at either the next FOMC meeting or the one after that.

There is no evidence to support this suggestion other than the fact that the size of increment at the last meeting was halved and the cycle has gone on for longer than is usual.

However, there is also a view that, given that the Central Bank is insistent that it remains data driven, and although inflation is falling, the rate of fall is barely increasing, while overall data for January was generally positive, the minutes could indicate that the latest hike of twenty-five basis points was a one off to test the water and a fifty point hike remains a possibility for March.

The U.S. still sees itself as the protector of the free world, but also prefers wars to be fought as far away as possible from its own shores. It is keeping up the rhetoric with China over the origin of the unidentified aircraft that it has shot down in the past weeks, and over the weekend raised concerns that Beijing is considering sending arms and ammunition to help Russia in its war with Ukraine.

Last week, the dollar index continued its slow but steady move away from major support around the 102 level. It reached a high of 104.67, but fell back to close at 103.88. It has some way to travel before the move can be considered any more than a correction of the fall from 108 to 100 that has occurred over the past three months.

This week, output data will also be released for February, as well as figures for existing home sales. The housing market has been one area that has been affected by rate increases and remains a leading indicator of a potential slowdown, down the road.

The final cut of Q4 GDP will be released and that is likely to be unchanged at 2.9%.

The highlight of the week will undoubtedly be the release of the FOMC minutes as the market begins to prepare for the release of the February employment report at the end of next week.

EUR – Market Commentary

Schnabel fears market risk of underestimating inflation

Confidence is continuing to grow that the eurozone economy is on the cusp of a significant period of growth after it has been in the doldrums since the beginning of the pandemic.

As with most feelings, there is little tangible evidence to support this other than to say that the fog of unease is beginning to lift.

The Eurozone still faces issues on several fronts. Inflation remains too high and in the view of the ECB further rate hikes will be necessary to see it return to the target of close to 2%. The war in Ukraine is in a state of flux, and although the level of fighting hasn’t so far increased, it is likely to do so in the coming weeks.

The Ukrainian President spoke last week of his determination to drive the invaders out of his country, and never accept any and to the war that allowed Russia to remain in control of any land that was in Ukraine before the invasion began.

The wholesale of gas has fallen precipitously over the past few weeks/months, and this has driven the ECB to call for support that is being provided to EU residents with their energy bills to come to an end.

The fear is that if there is any escalation of hostilities and Russia cuts supply or even threatens to do so, the gas price could rise again. A more formal methodology has been proposed that will see support be triggered if the gas price rises and stays above a certain level for a certain period.

The fallout from Christine Lagarde’s remarks last week that the ECB intends to hike rates by fifty basis points at its next meeting continues. Her testimony before the European Parliament last week has been called ill-advised in come Capitals and far worse in many others.

One supporter of Lagarde’s view is Isabel Schnabel, the German economist and member of the Central Bank’s Executive Board commented over the weekend that she feels that there is a danger of the markets underestimating the damage that has already been caused by high inflation and that price pressures should be reduced as a matter of urgency.

The euro is still gaining a degree of support from the ECB and its rate hike policy, but until the Fed signals a halt to its own programme of hikes, the amount of support will do little other than maintain the status quo.

The single currency was virtually unchanged last week, rising to a high of 1.0804 and closing at 1.0694.

PMIs will be released this week and are expected to show a level of positivity that is currently being felt throughout the region.

Also, due for release today, are construction output and consumer confidence data. The construction sector has been in decline for several months, and output is expected to rise on both a month-on-month and year-on-year basis.

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.