23 May 2024: Inflation fell to 2.3% in May


  • The Election has been called for July 4th
  • Home sales continue to struggle
  • A May increase in inflation will deter the ECB from committing to a series of cuts
GBP – Market Commentary

Hopes of a rate cut are solidified by falling price rises

The Prime Minister braved a torrential downpour yesterday afternoon to announce that the General Election will take place on July 4th.

Rishi Sunak immediately seized the initiative, making a passionate speech that appeared out of character as he reminded voters that it is only four years since he was appointed Chancellor of the Exchequer under Boris Johnson.

Sunak has not had a smooth ride during his meteoric rise to the top of the British political tree. He has faced three “seismic events” that would have tested the mettle of the most seasoned statesman.

He dealt with the challenge that the COVID-19 pandemic brought both economically and socially, had to complete Brexit even though he fundamentally believed that the decision of the people to leave the European Union was wrong, and still has the conflicts in Ukraine and Gaza to contend with.

Both the main political parties have already confirmed that they believe the economy will be the primary battleground for this election.

The Conservative Party has a plan, a fact that both Sunak and Jeremy Hunt have constantly reminded the electorate of over the past few months. In truth, that plan is working. Inflation is falling, down to 2.3% according to data published yesterday and the economy is growing at a rate that is faster than Germany, France, and the U.S. as it emerges from the brief recession that it had slipped into in the second half of next year.

Political Commentators will use two words to outline the factors determining the election; trust and change.

Which Party can the electorate trust to drive the economy forward over the coming years? Naturally, Sunak, with his plan, believes that the country will be in safe(r) hands by voting for experience, while Keir Starmer blames “fourteen years of mismanagement for the mess that the country has found itself in.

It may well be that the country simply needs a change of Government, which the Labour Party can certainly provide. However, this is more the Party of Blair than Corbyn and the most radical change will be the re-nationalization of the rail network.

A lot has changed since the Conservative Party, first as coalition partners of the Lib Dems and then in sole power since it followed the Blair and Brown era.

For some, the Election will be a welcome relief from the constant speculation about when a rate cut will take place.

Ironically, the publication of data which showed that headline inflation had fallen to 2.3% from 3.2% in April caused the market to lower its confidence that rates would be cut next month.

The Bank of England will hold just one meeting before the election, and the chances of the MPC delivering a welcome rate cut to the government have slipped to 50/50 at best.

The pound gained as the inflation figures disappointed the market, which was hoping for a full one per cent fall. It climbed to a high of 1.2761 but retreated quickly as the news of the election brought uncertainty.

USD – Market Commentary

The dollar gained ahead of the FOMC minutes

The publication of the minutes of the latest FOMC meeting proved to be the “damp squib” that the market was expecting.

Since several FOMC members have called for patience over the ensuing three weeks, and there has been no meaningful change in the outlook for growth or inflation during that time, nothing new emerged from the minutes.

An interpretation of the current economic situation considering the “bland” conversations taking place between FOMC members has brought a rate cut in September into sharper focus.

The FOMC appears to be split along similar lines as be MPC in the UK, with permanent members of the committee exhibiting more hawkish views than the Regional Fed Presidents who are more driven by day-to-day, or at least month-to-month changes in the economic outlook.

At a macro level, the economic effect of interest rates that have remained at their highest level since 2001 for more than six months now is beginning to wane as the economy adjusts. The rate of deflation has fallen to a crawl, and the employment market is beginning to see the effect of the rate hikes which immediately preceded the current hiatus.

The market is growing more concerned that a further rate hike may be needed for deflation to be jump-started into more substantial falls, although several members of the FOMC are content with the status quo, even if it takes well into the first half of next year for inflation to reach its 2% target.

Markets have grown used to a more proactive Fed during the modern era, so a period of “sitting on its hands” feels both unnatural and scary.

Tomorrow will see the publication of output data, broken down into manufacturing and services purchasing managers indexes. Both are expected to remain in expansive territory, although both are also predicted to be unchanged.

That will herald a cup-half-full scenario, which will be either positive or negative depending on analysts’ overall opinion of the path of the economy.

The weekly jobless claims date which will be released later today has reached a tipping point. The four-week average may well go above 220k new claims, which has been the top for some time. If claims continue to rise, it will point to a slowdown in employment, which has been the goal of the FOMC since it raised rates to 5.50% and may well cement a rate cut in September.

The dollar index reacted positively to the FOMC minutes, cementing its short-term bottom around 104.20. It climbed to a high of 104.97 and closed at 104.94.

EUR – Market Commentary

Several Council members are suffering “cold feet”

It is nothing new as the ECB approaches a point at which it is expected to make material changes to monetary policy, but it appears that several members of the Governing Council are beginning to get cold feet.

Over the past few weeks, Christine Lagarde has been conspicuous by her absence, appearing to want to avoid influencing the upcoming decision on a rate cut.

The group of Council members who are wary of a series of rate cuts appear to have accepted the June rate cut and have turned their attention to making sure that each decision is made on its merits and not as a part of a cycle of cuts which may prove difficult to stop.

Some time ago, Lagarde spoke of her view that the ECB would only begin to cut rates once it was certain that inflation had been “tamed” to such an extent that a series of rate cuts would take place.

That is exactly the situation that the Hawks are determined to avoid. Isabel Schnabel spoke earlier this week of her view that while a cut is a done deal for June, the data is not pointing to another cut in July. With no meeting scheduled for August, the gap between the July and September meetings may provide a degree of comfort.

It is interesting to note that there have not been any counterarguments about the need for a series of rate cuts. It may well be that the “usual suspects” who have voiced their concerns as rates rose to record highs have realized that theirs are the economies that have adopted the best and are achieving the highest levels of growth in the region.

The Governor of the Finnish Central Bank gave a more relaxed view of the timing of the first rate cut when compared to the Fed yesterday. Olli Rehn believes that the ECB does not have to “take its cues” from the Fed. “we are not the 13th district” Rehn commented, referring to the fact that the Fed is divided into twelve districts.

The ECB held out for longer than the Fed (and the Bank of England) when the decision was made to hike rates, and the “sky did not fall. In the eurozone, the “declining trend” in inflation and moderating wage growth meant there was a strong case for starting to ease monetary policy and cut rates in June.

The euro was in a reactive mood yesterday, losing ground in reaction to the publication of the FOMC minutes. It fell to a low of 1.0818 and closed at 1.0823.

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.