23 August 2023: Sixth meeting this year and three seems to be no plan

23 August 2023: Sixth meeting this year and three seems to be no plan


  • Treasury makes biggest ever payment to Bank of England to fund bond losses
  • Market looking forward to Jackson Hole for guidance
  • The euro has barely reacted to the inflation report
GBP – Market Commentary

Why is the MPC still giving out confusing signals?

The outcome of next month’s MPC meeting, the sixth this year, is still on a knife edge. Although inflation has finally begun to see a meaningful fall, Andrew Bailey and his colleagues are “glorying” in keeping the markets guessing.

While the level of any advance guidance is a balancing act between pre-empting the committee’s vote and being accused of providing mixed signals, the markets should have been provided by now with a set of parameters by which rate decisions are made.

Right now, there are three outcomes of the September meeting, a fifty-point hike, a twenty-five-point hike and a pause. Considering that the Central Bank should try to avoid volatility, let alone be the cause of it, Bailey has failed comprehensively to keep the traders, investors and analysts sufficiently informed to a level at which the meeting’s outcome is fairly certain barring any unforeseen occurrences.

At its meetings, the Governor suggests any proposed change to policy to the committee, they discuss their own personal views and the rationale behind them before a vote is taken that will determine the level of interest rates for the next six weeks.

Each members’ vote is a matter of public note but given that most of the committee report to Bailey, it feels like the independent members are little more than window-dressing.

It was announced that the Treasury has made a record payment to the Bank to cover the losses that have been incurred by its purchase of Government debt due to Quantitative easing.

Its balance sheet remains bloated by the bond purchases that are done on the Treasury’s behalf even though a decision was taken in February 2022 to halt further purchases. While in September last year, it voted to begin to reduce the size of its holdings by making regular monthly sales.

As interest rates have risen, the Bank is making mark to market losses since it is funding low-yielding assets with higher cost liabilities.

Sterling began the week on the back foot, although it initially rallied to challenge the 1.28 level versus the dollar. It reached a high of 1.2801 before falling back to close at 1.2732.

USD – Market Commentary

Economy appears robust, but is it an illusion?

It would be hard to accuse Jerome Powell of misleading the American People to the financial markets, given his almost puritanical belief in telling the truth to the best of his ability.

It is incredible that he was appointed by former President Trump who has been accused of being “economical with the truth” on several occasions.

Yest dispute Powell’s assurances there is still a nagging doubt about the health of the economy currently and the possibility of a debilitating recession arriving sometime early next year.

As the Fed has fought a battle with inflation that it has not only won but done so by using tactics that would appear alien to several global Central Banks. It has used tighter monetary policy, of course, but has done so in a less “straight line” manner than others faced with the same issue in the past.

While the Bank of England was apologetically hiking by twenty five points at successive meetings, only once facing up to its responsibilities by adding fifty basis points to the base rate of interest, and then only in June this year, the FOMC has proven to have it “finger on the pulse” of inflation and being proactive in its monetary policy decisions.

It is true that two significant indicators still show the possibility of a recession., The inversion of the yield curve indicates that interest rates will be significantly lower in the future than they are now, while the Conference Board’s index of leading indicators is also pointing to an economy on the cusp of heading south.

It is easy if not glib to simply say that every economic cycle is different, but looking at the past few years, the hits that the global economy has have been close to unprecedented.

There has never been a global pandemic that has caused countries to introduce lockdown with a potentially devastating effect, while a war has broken out on the European mainland for the first time in more than seventy years.

In May this year, Powell’s approval rating fell to precarious levels but as more members of the public doubt that there will be a recession, oy has risen closer to what is expected of a Fed Chair already well into his second term.

The dollar index rallied to its highest level this quarter yesterday, reaching a high of 103.75. It maintained its relative strength to close at 103.60 as the market looked forward to Powell’s keynote speech at the Jackson Hole Symposium tomorrow.

EUR – Market Commentary

Windfall tax is considered outside the spirit of the rules

Christine Lagarde’s first order of business on returning from holiday has been to sign a letter issuing a stinging rebuke to the Italian Government for having introduced a windfall tax on its banks.

While there is no regulation banning Rome from introducing new taxes, the ECB has “dotted line” regulatory authority over all Eurozone banks, the feeling is that it should have been at least informed in advance.

As all sports fans will be aware compliance with the letter of the rules is mandatory, compliance with the spirit of the laws is something entirely different.

Giorgia Meloni and Christine Lagarde are two strong independent and powerful women who have grown used to not mincing their words.

Lagarde has been accused of overstepping several time this year already when delivering advance guidance, perhaps better called advance warning, of the Governing Council’s intentions, while Meloni has the full support of her Cabinet and Central bank is railing against the continual hikes in interest rates that have driven her country to the brink of recession.

It would be easy to dismiss Meloni given that she is the first female Prime Minister in Italian history and the fact that she leads a far-right government for the first time since Mussolini.

However, she is far from a fascist. She puts forward sensible policies to combat the country’s perennial issues of too greater reliance of people on state support and migration across the Mediterranean of mostly African refugees.

Lagarde will avoid any confrontation in the short-term as she jets off to Wyoming to attend the Jackson Hole Symposium. Recently she has dialled back her hawkish rhetoric which has encouraged the market to believe that the ECB is close to ending, or at least pausing its programme of rate hikes. Although it started after other G7 countries it has shown similar flexibility to the Fed in varying the size of its hikes.

There has been a growing divide between the hawks and doves, with the doves proposing several alternative solutions to constant rate hikes. These alternatives will be to the fore when the Governing Council meets on 28th September to decide on any changes to monetary policy.

The recent rise in the value of the Euro petered out as had been expected yesterday. It fell to a low of 1.0832, closing at 1.0845, having initially risen to a high of 1.0930.

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.