20 September 2021: Haldane becomes levelling up Guru

Haldane becomes levelling up Guru

20th September: Highlights

  • Rising inflation leaves BoE unfazed
  • Fed to offer clues on support, no more
  • Germany trusts ECB to keep inflation in Check

Gas price is likely to boost inflation

The Bank of England’s Monetary Policy Committee will meet this week. It will be its first opportunity to discuss the economic recovery from the Coronavirus Pandemic since early August.

The committee has undergone something of a move towards a more hawkish stance with the introduction of a new external member in Catherine Mann and the arrival of Huw Pill as Chief Economist, replacing Andrew Haldane.

Haldane was expected to take up a new role as Chief Executive of the Royal Society of Arts, but it was announced at the weekend that he will be the Government’s new levelling up guru.

Both Pill and Mann are on record as commenting that the Bank of England should begin to withdraw additional support for the economy sooner rather than later.

Haldane will head up a task force reporting to Minister Michael Gove at the newly named Department for Levelling up, Housing and Communities.

Ensuring that economic prosperity would be shared across the entire country was a cornerstone of the Conservative Party’s election manifesto and was one of the key elements in breaking down the red wall of traditional support for the Labour Party in the north of the country.

Gas prices have surged to unprecedented levels in the UK in the past few weeks, in a move described by the Prime Minister as a temporary problem caused by the rebound of the global economy.

Boris Johnson’s Business Minister Kwasi Kwarteng was sufficiently concerned to call a meeting with the CEO’s of the UK’s energy companies and the regulator OFGEM over the weekend.

If this situation continues into the winter when demand is high, it will be an additional burden for inflation, which is already a major concern for the Bank of England.

With rate decisions on both sides of the Atlantic this week, volatility is expected to rise for the pound.

Last week, it fell to a low of 1.3728, closing at 1.3740. It has continued to weaken as the market has begun the week in Asia. It has so far reached a low of 1.3701 and is currently (0500) trading at 1.3710.

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Eleven sectors monitored by DoE, none at pre-Covid level

The main focus of the market’s attention this week will be the FOMC meeting that will take place tomorrow and Wednesday, with both the announcement of the committee’s decision on short term interest rates and a press conference with Jerome Powell taking place on Wednesday evening UK time.

There is very little expectation that the Central bank will announce any change in its support for the economy, although commentators will be disappointed if there is not a significant degree of advance guidance provided.

The economic data released over the past few weeks has been, at best, indifferent and this has led analysts to push back their agenda for a reduction in asset prices, possibly the New Year. This comes despite Powell commenting at the Jackson Hole Symposium that he hoped to begin the taper by the end of the year.

The FOMC meeting will also publish the Fed’s economic projections which will provide a clue as to how it sees the economy performing over the next two years, and, importantly, includes the individual members’ own forecasts based upon activity in their own regions.

In the face of some severe shortages of both essential and luxury items, consumer confidence rose moderately so far in September. This was against an expectation of 72.2. Confidence rose to 71, following a reading of 70.3 in August

The Federal debt ceiling, which is the amount that Congress allows the Treasury to borrow has been a political football in the U.S. for many years.

Congress’ decision on raising the ceiling often becomes a game of chicken, where politicians wait until the last minute to give their authority.

The treasury Secretary made a plea to Congress yesterday for their approval, commenting that failure to do so would be an unprecedented, historic financial crisis.

The dollar performed something of a rebound from its recent lows last week and this is expected to continue this week, although a lot depends on the FOMC meeting. Any sign of dovishness could see the Greenback lose ground.

Last week, the dollar index reached a high of 93.24 and it closed at that level.

Chancellor leaving with economy under pressure

The Federal Election will take place in Germany, and this will mark the end of an era with Chancellor Angela Merkel stepping down after 16 years.

Merkel has been described as a bulwark of stability for the country and also for the EU.

While her policies have not always been popular, she has provided a degree of consistency for Europe despite the ultimate failure of her desire to leave office having placed the Union on a clear path towards a more Federal footing.

There have been several reasons why she has been unable to achieve this goal.

The heavy-handed approach she demanded when dealing with the debt issues of weaker economies at the time of the financial crisis made her unpopular, while the rise of the French right left her without a strong partner, despite Emmanuel Macron being a compliant ally.

The Governor of the Bank of Spain, Pablo Hernández de Cos, spoke last week of his doubts that there would be any rate hike in the Eurozone in 2023. While this was also the market’s view, it adds weight to the view that the ECB won’t consider hiking rates until it has finished completely with adding support to the economy.

De Cos was joined by Latvian Central Bank Governor Martins Kazaks in commenting on the economy. Kazaks does not see inflation being a permanent concern to the economy, although he believes that inflation will remain above 2% in the medium term, but the Central bank can cope with this.

This sentiment was backed by Irish Central Bank Governor, Gabriel Makhlouf, who commented that fears of excessive inflation are overstated.

The comments of these three Central Banks underscore the feelings of the more dovish Governing Council Members and provides some context to the internal wrangling that is taking place at the ECB.

The euro was a victim of a stronger dollar last week. It fell to a low of 1.1724, closing just one pip from its low.

Have a great day!
About 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.”