25 April 2023: Sunak shows support for SMEs


  • Pain still being felt even as economic prospects improve
  • As banking price fades, Fed looks at finally cooling inflation
  • Unless wage growth slows ECB will continue to raise rates
GBP – Market Commentary

Government pledges support for businesses

The inflation rate is still above 10% despite the Bank of England having hiked short-term interest rates eleven times in succession and is set to hike again at its next meeting on May 11th.

While the headline is still far too high for the Central Bank’s liking. Component parts are also alarming. Food price inflation is at its highest in 45 years, reaching 19.2% in the twelve months to March, up from 18.2 a year earlier.

The Monetary Policy Committee is being accused of showing a significant lack of imagination in using tried and, to date, tested methods to try to counter rising prices despite them having no visible impact thus far.

There seems to be an almost fatalistic view being taken over inflation although the policy of little and often over rate hikes clearly fails to work.

Both the Federal Reserve and European Central Bank have had a degree of success by using jumbo rate hikes to bring inflation down, while the Bank has used its current tactic for fear of crashing the economy.

Both Jerome Powell and Christine Lagarde, as well as several of their colleagues have commented that they see continued high inflation as the most serious threat to economic stability, while Andrew Bailey is clearly fearful of the nascent, yet fragile recovery that is supposedly taking place.

Consumers see no end to the cost of living crisis that has become a battle being waged in the supermarket aisles and no longer when energy bills arrive.

The Bank of England jealously guards its, relatively, new-found independence while City economists see the three independent members of MPC treating their role as more of an academic exercise than a vital part of the creation of price stability in the UK.

When dovetailing into fiscal policy, determined by the Treasury, under the auspices of the Chancellor of The Exchequer there appears to be a disconnect with the two pulling in opposite directions while the consumer suffers.

The current opposition with no front bench members who have experience in Government are constantly stirring the pot, anxious to be given their opportunity to bring their policies, which remain a closely guarded secret, to bear.

Next week, there will be local government elections held, which will be a litmus test for the work Rishi Sunak has done to date and the faith the electorate has in him going forward. While his personal approval rating is rising, there remains little faith in his Party’s ability to deliver growth, lower taxes and an end to the cost of living crisis.

Yesterday, Sterling rose on the back of continued uncertainty about Fed interest rate policy. It reached a high of 1.2448 and closed at 1.2441.

USD – Market Commentary

Recession unlikely but little growth expected

As the Market digests first quarter earnings reports from a number of sectors of the economy, housing data which is due for publication later today and is not currently considered to be tier one information is taking on some additional significance as this is one area of the economy that is experiencing a definite upswing.

It was reported last week that people looking to move house are moving more towards new builds because seller’s perception of inflation makes them feel that their properties must be worth more than the market suggests.

Today, the S&P/Case Shiller index of house price rises for February will be released. While has a quite significant lag, the nature of the market is that it takes a long time to shaft trend, and analysts look behind the headline for regional points of significance.It is expected that after a year-on-year rise of 2.5% in January, the market will have cooled off in February’s and prices may be either flat, or show a less and 0.5% rise.

Meanwhile, Numbers for new home sales, also due for release later, are expected to show a continuation of the healthy increase they saw in February, adding another approximately 650k in sales in March.

While house building creates a follow through in several areas of the economy, the two main areas of growth, manufacturing and services are continuing to diverge.

Following the almost total export of manufacturing output to China there have been a number of initiatives to try to repatriate traditional industries like car manufacture and heavy industry with very limited success given the long lead in and the time it will take, if at all, for those industries to become profitable is prohibitive.

Even if there were to be sufficient investment to make them viable, they would have next to no potential for export when competing against countries with a far lower cost base.

While the argument about whether the country is heading for a recession later in the year rages on, the Fed appears certain to hike rates by another fifty basis points early next month.

It is what happens next that is exercising analysts and investors the most. While it remains a distinct probability that Jerome Powell will at least hint at a suspension of hikes, there remains a possibility, however vague, that he may continue to hide behind the data.

The dollar will continue to suffer until there is a degree of clarity over monetary policy.

Yesterday, it fell to the bottom of its recent trend, reaching 101.33, and closing just one pip higher. There is a line of support around the 101 level with more significant buying interest ahead of the 100 level.

EUR – Market Commentary

The Belgian Central Bank ahead ignores his own policies

Yesterday it was noted that Belgium currently has the highest budget deficit in the Eurozone. It is currently running at 5.1%, although this is coming down it still represents a significant overspend compared to the EU’s growth and stability pact.

It is therefore ironic that the Head of the Belgian Central bank, Pierre Wunsch, chose yesterday to speak about how interest rates will most likely continue to rise until there is a moderation of wage pressures in the region as a whole.

Wunsch is a member of the Frugal Five, although he prefers to stay in the background allowing his Austrian and German colleagues to do his talking.

Wunsch opened up a little about his hawkish views, commenting that it would be no surprise if interest rates rose to above 4% in the region as inflation is being driven to a certain extent by higher than average wage settlements.

He went on to say that it is not as if I enjoy hiking rates, but inflation is not yet heading in the right direction.

No one has ruled out a fifty point hike in May, although the consensus is for a twenty-five pointy rise in short-term rates.

Wunsch can be considered to have seen it all before, having been a Central Banker since 2001.

In a week when it has become clear that services output is growing in significance across the entire developed world, even the Eurozone which originally saw the harnessing of Germany’s industrial might for the good of the entire region, services continue to make a more significant contribution to overall output.

The services sector rose from 55 to 56.6 in the flash PMI data that was released yesterday. This was the highest reading in over a year. This is while overall manufacturing output slipped into contraction, falling from 50.4 to 48.5, with new orders being the standout weak point.

Interest rate costs of the manufacturing sector have been seen as hammering investment, and it will take the rest of this year, at least before any recovery will be seen.

The single currency continues to be supported by ECB policy. Yesterday, it rose well above the 1.10 watershed level. It reached a high of 1.1050 and closed at 1.1046. It would now appear to have momentum to push on targeting the 1.1180 level where there may be some selling interest.

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.