21 April 2023: No end yet to cost of living crisis


  • More misplaced optimism about the UK economy
  • Security, not trade the focus of U.S./China relations going forward
  • Consumer confidence still bumping along the bottom
GBP – Market Commentary

Real incomes continue to fall

This week’s release of employment and inflation data has painted a different picture to the optimistic noises emanating from the Government and more recently the Institute of Directors.

Following an unexpected rise in jobless numbers, the figures for inflation in March showed that despite the Bank of England having raised interest rates, albeit in modest increments, at every meeting of the MPC since December 2021, at an annual rate in excess of ten percent.

Chancellor of the Exchequer, Jeremy Hunt, and his colleagues at the Treasury were disappointed recently by the IMF report which placed the UK at the bottom of the league table for GDP this year in the G20.

While the Government likes to speak in terms of potential and future performance the IMF is using a completely different set of models and tends to disregard current output as a measure of future performance.

It is different to put a positive spin on a monthly employment report which shows that jobless claims went from a fall of 18.8k to a rise of 28.2k. In fact there was very little official comment on the data at all.

The rise in the number of people out of work should alert the Central bank to the potential dangers of continuing to raise interest rates, particularly when, according to its own data, it expects prices to fall naturally, later in this quarter and through the next two.

Silvana Tenreyro, who is leaving her role as an independent member of the MPC soon compared her colleagues to a fool In the shower who scalds himself by being impatient for the water to reach the right temperature as she firmly believes that interest rates are already too high for the economy to bear.

Tenreyro finds herself as the chief dove, a label that will likely remain with her until she leaves in September.

Retail sales data is due for release later this morning. It is expected that the recent trend of a fall of a little over 3% will continue as the consumer continues to be concerned about rising prices.

Yesterday, the pound was a little becalmed as traders remained unsure of its future path. On the one hand a further rise in interest rates encourages the bulls, while the prospect of a Bank of England being forced into an emergency cut as the economy nosedives is growing. Sterling ended the day just three points higher at 1.2443 versus the dollar.

USD – Market Commentary

FOMC members still hawkish on inflation

In its most recent note to investors the prominent U.S. investment bank, J.P. Morgan, rekindled its fears that the U.S. economy is headed for a severe downturn resulting in far more than a technical recession.

It believes that high rates of inflation won’t allow the Fed to halt interest rate rises and the resultant squeeze on margins, particularly at small and medium-sized businesses will drive the economy into recession.

The investment bank goes on to say that inflation won’t provide the FOMC with a reason to ease monetary policy before a recession takes hold.

In a survey conducted by J.P. Morgan as part of its research, 90% of respondents see a recession materializing around the first quarter of 2024. This will be a blow to President Biden’s chances of reelection later in the same year, since it will give the Republicans more ammunition with which to attack his record.

A slowdown in GDP will quickly spread throughout the global economy despite China publishing encouraging results this week for its economic growth in the first quarter.

There are some concerns being voiced over the relationship between the world’s two biggest economies and their reliance on each other as supplier and consumer.

Going forward the Biden administration will be more concerned over national security considerations than in bolstering trade links. This is a complete one eighty-degree turn from the relationship that was fostered under the Trump administration.

The FOMC still believes that overall the economy is headed for a soft landing as interest rates will reach 5%. Cleveland Fed President, Loretta Mester was among several Fed Presidents speaking yesterday. She believes that demand is still outpacing supply and inflation remains too high leading to further rate hikes on the horizon.

The dollar index remains supported by the Fed’s apparent hawkish stance which may now continue until the end of the current quarter.

It remains within its recent range falling marginally yesterday to a low of 101.63 and closing at 101.78.

EUR – Market Commentary

Data to determine size of next hike

Philip Lane, the ECB’s Chief Economist, commented recently that the Central bank will hike rates at its next meeting, but it will be economic data which determines the size of the hike.

Having already noted that inflation, while falling, is not receding fast enough for the more hawkish members of the Governing Council, today will see the release of data which may show the opposite side of the case for a smaller increase.

Purchasing Managers Indexes are due for publication this morning. They are one of the prime indicators of activity in the economy. With fifty being the mean level between expansion and contraction, manufacturing output, which remains the single most important part of the index, still languishes below the all important level.

Following a fall to 47.8 in March, it is expected that manufacturing will see a marginal improvement to 48 this month. A strong performance from the services sector has dragged the composite above the fifty level, but this may be masking the overall weakness of an economy that is built on a strong manufacturing sector.

The same is also true of the German economy which is also struggling with a weak manufacturing sector which is even more pronounced than the overall picture for the Eurozone.

Manufacturing output is expected to be unchanged at 44.7, while the services sector improves to 54 from 53.7.

While this data is hardly likely to change any long-standing hawkish or dovish views it may be used by dovish members of the Governing Council to persuade their colleagues that a twenty-five basis point hike in rates is justified.

The views of the Frugal Five are somewhat entrenched that they are unlikely to be swayed by a data stream that is entirely predictable while inflation remains stubbornly high. However, the data does provide the doves with some ammunition to limit the size of the hike.

Yesterday, the euro kept its overall supported stance although the 1.10 level is still proving to be elusive. The single currency rose to a high of 1.0989 and closed at 1.0970.

Its short term path will be determined by the potential, or otherwise, for a fifty point hike at the next rate setting meeting which takes place on May 3rd.

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.