20 July 2023: Headline inflation fell to 7.9% in June

20 July 2023: Headline inflation fell to 7.9% in June


  • Inflation fell in June, but rates will still rise
  • UPS strike to cost the economy seven billion dollars
  • Core inflation was stronger than anticipated in June
GBP – Market Commentary

The Bank of England will be encouraged by its more hawkish policy

The headline rate of inflation fell to 7.9% in June, the lowest it has been in more than a year. Inflation had been predicted to fall from the rate of 8.7% seen in May to 8.2%.

The market immediately divested itself of long Sterling positions, believing that the fall in the rate of inflation means that the Bank of England is less likely to feel the need to add a further fifty basis points to the base rate of interest.

While this is one scenario, the Bank may also consider that having seen the effect of a larger-than-expected hike last month, they may feel empowered to “repeat the dose.”

The Chancellor welcomed the news, saying that the Government understands that high price increases are still a huge worry for households and businesses.

The fall in the rate of inflation has seen forecasts for the peak in the base rate drop from 6% to 5.75%. It is going to be difficult to predict the further seventy-five basis points that are predicted to be added will be in the twenty-five-point hikes or another fifty, followed by twenty-five a little later in the year.

A month or two ago, Rishi Sunak’s pledge to halve the rate of inflation from when he took office by the end of the year looked decidedly optimistic, but now there is a chance that it can be achieved if the Bank of England can keep its nerve.

Although there will be a new member of the MPC voting at its meeting in two weeks’ time, her opinions will make interesting reading, but Megan Greene faces a huge task to bend the deeply entrenched views of most of her new colleagues, who in any case continue to vote as a bloc.

There remain questions about the makeup of the Monetary Policy Committee, and there is pressure coming from backbenchers for a study to be undertaken to see if a more regional bias could be adopted to make the committee more representative.

It was widely reported yesterday that a former Chief Economist at the Bank of England believes that the top rate of income tax would be increased since it is felt that interest rate increases alone will not bring inflation back to the Government’s 2% target.

As interest rates in most of the G7 nations reach the point where they are neutral, neither stimulating nor restricting demand, their effect becomes magnified. Where previously CFOs were struggling to invest in their businesses, higher rates could be absorbed into cash flow. As rates have risen, that choice is removed, and interest payments now become a burden on investment.

The pound lost more than a cent in a knee-jerk reaction to the inflation news, and although it recovered a little, still ended the day lower overall. It fell to a low of 1.2867 and closed at 1.2939.

USD – Market Commentary

Most “experts” believe that the FOMC will vote for another hike next week

After close to three years in power, the outside view on President Biden’s Presidency has been more than a little lukewarm. Within the borders of the U.S., such a benign Presidency has been welcomed after the tumult of the “Trump years.”

With nothing better to do than tour the country hurling insults at the present incumbent and his staff, Donald Trump has begun the campaign for the November ‘24 election early, assuming that he will receive the Republican nomination.

It is sixty years since there were two consecutive Democrat Presidents, but even then, Lyndon Johnson was not elected, taking over the Presidency following the assassination of John Kennedy.

The last time two Democrat Presidents were actually elected consecutively was in 1945, when Truman replaced Roosevelt.

President Biden has announced that he will stand again next year, but clearly, he has the weight of history against him.

Biden has presided over a tumultuous period which started with the Capitol Riots, carried on through the Pandemic and will hopefully end with the economy experiencing a soft landing with inflation back under control and growth returning to a greater degree.

While he has been a “steady hand on the tiller,” Biden does not receive credit for steering the economy through the past two and a half years. He does not actively court popularity, but it is a testament to him that he has obviously surrounded himself with a Cabinet of very able people.

The combination of Janet Yellen, who was the last Fed Chairman nominated by a Democrat President and Jerome Powell, a Lawyer who was appointed by Trump, has been a winning combination for both the regulation of the markets and the gradual improvement of the economy. It was brave of Biden to retain Powell since Congress was baying for him to be removed as a “Wall Street controlled Republican.”

There is still work to be done to ensure that inflation is defeated, and the economy does not experience a recession, but given what we know now, the country could do worse than give President Biden four more years to bring further stability to the Country.

The dollar index remains driven by consideration of when the Fed will finally end its cycle of interest rate hikes. The Inflation and employment reports for June as well as retail sales figures all point to both prices and the economy moving in the right direction, and it is highly likely that had the FOMC not paused last month, it could have ended the period of hikes already.

However, it is likely, if far from certain, that there will be one more hike, agreed at the meeting on September 20th. The fact that there is no meeting in August muddies the water, with time being the great imponderable, with two more months of data to be pored over before a decision is made.

The dollar index remained in recovery mode yesterday, climbing to a high of 100.53 and settling back to close above short-term support at 100.27.

EUR – Market Commentary

Secondary effects are keeping core price rises high

The runup to next week’s meeting of the Governing Council is still seeing rival factions demand either an end to rate hikes or rate increases to continue well into the Autumn.

One of the more hawkish Central Bank Governors, Klaas Knot, of De Nederlandsche Bank, may have provided a clue to a more conciliatory attitude, when commented this earlier this week that while a hike is certain at next week’s meeting, the gap between meetings will allow greater time for consideration of the data and that makes a hike in September far less certain.

The Banca D’Italia Chief, Ignazio Visco, continued his call for rate hikes to end immediately, commencing yesterday that inflation is set to fall more quickly than had been expected.

Unfortunately for Visco, his colleagues at the ECB will want to see data before taking his word for it, and even then, they may still want the insurance afforded by a further hike.

The Governing Council’s newest Member, Boris Vujcic, Head of the Croatian Central, who on balance leans toward being a hawk on interest rates, commented yesterday that it is likely that the September meeting will be more open than it has been since he joined.

Bundesbank President Joachim Nagel has also been speaking this week. He believes that the hard landing that has long been predicted for the region may still be avoided, particularly since interest rates have not yet become restrictive on demand across the entire Eurozone. He added that his view is that rates are nearing their peak.

The upcoming election in Spain is on a knife edge, and there is a real possibility that the moderate right-wing majority may be lost. The far right is predicted to take the majority of seats for the first time since Franco.

It is possible that the European Union’s rules on immigration which definitely drove the Far Right into power in Italy, are affecting voting sentiment.

The resilience of the economy where inflation has fallen to manageable levels is having a negligible effect on voters. Voter turnout is expected to be low as the country battles against record temperatures which drive the fear of wildfires that have plagued the country over the past few summers.

The Euro is running out of steam following its rise over the past two weeks. It faces resistance at 1.1240 and yesterday fell back for that point to a low of 1.1174 and closed at 1.1200.

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.