25 January 2023: UK Borrowing soars


  • UK debt to GDP ratio reaches 100%
  • Global recession fears hit risk appetite and pushes dollar higher
  • Energy market improvement means Germany may avoid recession
GBP – Market Commentary

Support payments drove indebtedness

The level of UK borrowing has risen to frighteningly high levels as the cost of support provided to counter the effect of the Pandemic is added to the new energy cap.

The capo is set to be raised again in April, which will add to the pressure being felt by households struggling to cope with the cost of living crisis.

The Public Sector Borrowing Requirement (PSBR) rose to £27.4 billion in December, up from a little over £21 billion in November. This is almost double the single month amount from December 2021.

The Chancellor is reportedly looking at ways to both reduce the level of borrowing and how to service existing debt in the upcoming budget.

He is already committed to a 10% increase in state pensions and certain benefits following his decision to comply with the triple lock.

Any thought of cutting the tax burden on both corporations and individuals has been shelved until November at the earliest.

The interest paid to service the Government’s borrowings was the second-highest on record.

The cost of the energy price guarantee rose to £7 billion, although that is set to ease as the gas price has fallen in the past couple of months and should see a fall given that the country will begin to emerge from winter over the next two months.

In addition, interest payments soared to £17.5 billion and are expected to top £115 billion in the current Financial Year.

The country’s balance sheet is looking very unhealthy and is not expected to be improved by the recession that has probably already begun.

In a severe downturn in the economy, tax receipts fall, while benefit payments to those who have lost their jobs begin to rise.

Thankfully, unemployment isn’t rising to the extent that has been seen in previous recessions although given that it is currently close to all-time lows, some increase must be expected.

Preliminary figures for services output in January were released yesterday. They showed a further fall into contraction, dropping from 49.3 in December to 48 this month. A level of fifty is the level at which output is seen to be expanding or contracting.

The pound fell to a low of 1.2263 following the release of the borrowing figures, but bounced to close at 1.2335 following a fall in global risk appetite.

USD – Market Commentary

Lower inflation and weaker data to be discussed at FOMC

The next meeting of the FOMC which takes place a week from today is expected to concentrate on the fall in inflation and the outlook for the economy.

Weaker data may drive the Fed to consider a hike of just twenty-five basis points as it strives to reach its apparent target of 5%.

With hikes priced in for the next three meetings, the Central Bank is unlikely to end the current cycle of rate hikes until the meeting that is due to be held on May 3rd.

While inflation is falling, the effect of short-term interest rates that have now comfortably moved into restrictive territory has been disappointing.

There is no reliable correlation between rising interest rates and the fall in inflation. This is especially true right now, given that the employment market remains buoyant.

Although the headline figure for new jobs created is expected to fall when the January figures are released next Friday, rising wages are still an issue. Although average incomes are failing to keep up with inflation, they are still rising at a faster rate than has been seen since before the Pandemic.

Business activity contracted for the seventh consecutive month in December, but the outlook is beginning to brighten. The size of the fall in both manufacturing and services output moderated significantly. The downside of the output data that was released yesterday, is that price pressures remain high which doesn’t tally with falling producer prices which added to optimism over consumer price inflation recently.

The Fed remains hawkish over inflation since Jerome Powell wants to stamp down hard not only to bring inflation down but make sure that it remains low.

For that reason, short-term interest rates are unlikely to fall for slime time once they have reached their assumed target of 5%.

The dollar index fell marginally yesterday. When this happens and coincides with relatively weak data, the market generally blames risk appetite, which is a catch-all phrase used when traders are unsure of why the market is behaving contrary to their expectations.

Yesterday, the index initially rose to a high of 102.43 but fell back to close at 101.90 where there is strong support.

EUR – Market Commentary

Berlin fears targeted Moscow retaliation

Overnight, the German Government acceded to pressure from the rest of the European Union as well as the U.S. and UK to provide tanks to Ukraine to help in its war with Russia.

The tide was turned in German opinion by the U.S. agreeing to also provide more equipment. Germany has more than 2,000 tanks available to it, but by its own admission the majority of them have already been deployed in other nations, making their delivery logistically difficult.

Germany has agreed to send 14 Leopard 2’s while the U.S. is sending 30 equivalent tanks. It is hoped that this will turn the tide in hostilities that are fast approaching their first anniversary.

Germany, fearing Russian retaliation, has been reluctant to send more equipment. Russia’s ambassador to the U.S. called the actions of both nations a blatant provocation.

Since Germany is only just beginning to turn the corner following issues over gas supplies which have led to the threat of rationing gas usage between domestic and industrial use, a further supply, or price, shock will severely impart their hopes of avoiding a recession.

Its economy has been described as basically stagnating for the entire fourth quarter of 2022 and is now only beginning to see encouraging data.

While manufacturing data remains in the doldrums, services output returned to expansion in preliminary data from January that was released yesterday.

The composite reading for the entire Eurozone also returned to expansion, reaching 50.2 in January, following three months of contraction.

The ECB is being accused of sending mixed messages regarding its commitment to raising short term interest rates to combat inflation, which remains high.

There is a blackout period around the time of ECB meetings, but that is considered voluntary and several Central Bank Governors from indebted nations ignore the pleas of the ECB not to either voice their opinions or voting intentions which are often counter to the majority view.

The Euro remains well-supported, but unable to break and hold above the important 1.09 level versus the dollar.

Yesterday, it reached a high of 1.0897 but fell back to close at 1.0881 where there is minor support.

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.