25 June 2024: Future rate decisions will be close


  • S&P upgrades its forecast for UK economic growth
  • How strong is the U.S. economy in reality?
  • Inflation is fading, but the economy is fading faster
GBP – Market Commentary

Bailey believes there is still work to do on inflation

Advance guidance Andrew Bailey and his colleagues provided on the Monetary Policy Committee has been sparse at best recently and often nonexistent.

Since Catherine Mann abandoned her one-person crusade for rates to be increased due to the “stickiness” of inflation, there have been very few comments about when the first cut will take place, and this has led the market to form its conclusions.

Bailey himself has been chastened by the commotion he caused when he commented that the headline inflation would not necessarily need to fall to the Bank’s 2% target for rate cuts to begin. Over the past few months, every time inflation has fallen, culminating in the inflation rate reaching 2% in May, the expectation of a rate cut has increased.

Bailey appeared from his figurative bunker yesterday to say that the most recent rate decision and those that follow are going to be “tight.”

He agreed that things look better than they did a year ago, as the Bank was considering halting its cycle of rate increases, primarily due to concerns that the constant stream of hikes may be affecting the economy.

This was a clear reference to the chaos caused by Liz Truss and her “budget for growth.”

He did, however, warn that there is still “work to be done,”, particularly in the areas of wage increases and service inflation.

Speaking at an IMF-sponsored conference in Marrakech, Bailey remarked “From an economic point of view, if we look back over the last year I would say I’m probably the one person that can come in here and say things do look better today than they did on this day last year,”

S&P Global Ratings has upgraded its forecast for UK economic growth after a better-than-expected start to the year and ahead of a boost from looming interest rate cuts.

The rating agency on Monday lifted its forecast for UK economic growth for 2024 to 0.6 per cent, up from just 0.3 per cent previously, on the basis that inflationary pressures will continue to ease, and the country will also benefit from ‘improving terms of trade’.

The ONS will report later this week on its findings on how the economy performed in May after flatlining in April.

Manufacturing and construction output was lower in April, the latter primarily due to the unseasonably wet Spring in the UK.

Consumer confidence is expected to improve following the fall in inflation to 2%.

The pound rallied yesterday, reaching a high of 1.2698 versus the dollar and closing at 1.2684. Versus the Euro, it lost ground, falling to a low of 1.1793 and closing at 1.1812.

USD – Market Commentary

If the current trend continues, a rate cut may be imminent

After several months of overtly hawkish comments from several officials of the Federal Reserve, they have decided to calm their rhetoric, having driven the market into only expecting one, or no rate cuts at all this year.

Jerome Powell has been consistent in his comments that the Fed is, rightly, being guided by the data, even hinting that it may be necessary for the FOMC to agree to a further rate hike if the level of inflation doesn’t continue its downward path.

That threat seems to have passed as inflation has continued to fall, even if that is a leisurely pace over the past couple of months.

His colleagues have “taken over the baton” now and are providing further guidance to the market of the Fed’s current view.

Austen Goolsbee, the President of the Chicago Fed, and Mary Daly from San Francisco both gave their less hawkish views to reporters yesterday.

Goolsbee expressed cautious optimism about the cooling of inflation in an interview with CNBC. He highlighted that the current inflation trends and economic indicators could potentially pave the way for a future reduction in interest rates.

He remains hopeful that the FOMC will gain confidence in easing inflationary pressures, which have been higher than anticipated for some time. He went on to say that outside of inflation, the economy is showing signs of cooling, although job creation is still above where his colleagues expected it to be at this point.

Daly did provide a note of caution. She commented that despite the relief provided by lower inflation data, the Fed has no choice but to keep rates “pegged” for longer if price growth doesn’t cool towards the 2% target.

She believes that while no one on the FOMC expected the fall in inflation to be linear, the “bumpiness” has not inspired confidence.

The FOMC is very aware of its dual mandate of promoting employment while holding price pressures at bay. With the employment data having been “encouraging” since the start of the year, the Fed has been able to bear down on inflation.

The dollar index ran out of steam yesterday, fell to a low of 105.37, and closed at 105.49. A minor level of support at around 105.20 should provide a base for the Greenback.

EUR – Market Commentary

Barnier warns of a “Frexit” challenge

While the French election does not appear to be as “cut and dried” as what is currently happening in the UK, it does appear that Marine Le Pen’s National Rally Party is on course for a famous victory.

Incumbent French President, Emmanuel Macron, expressed concerns about the divisive policies pursued by both ends of the political spectrum.

He singled out Marine Le Pen’s far-right National Rally and the far-left France Unbowed, led by Jean-Luc Mélenchon, accusing them of exacerbating tensions within French society.

France is a nation, not unlike Italy, which is more willing than most to radically change its political landscape if the incumbent is centrist, as Macron is.

After seven years in power in which the economy has steadily weakened, French farmers, who are more radical than their counterparts in the rest of the EU, have seen enough of Macron’s thirst for wider European involvement and are demanding action to protect their livelihoods.

Two seasoned “Europeans” expressed their concerns about the direction that France is taking, Olaf Scholz, the German Chancellor. He expressed concern about the looming electoral success of the right-wing populists in France.

“I’m worried about the elections in France,” Scholz said on Sunday in his summer interview for the public broadcaster ARD.

Germany has seen the right-wing AfD Party celebrate significant successes in the European Parliamentary Elections that were held recently and a shift to the right in France as well as the continued success of Giorgia Meloni in Italy is a worrying trend for the centre of European politics.

Michel Barnier, the current French Minister for Foreign Affairs, who was previously the EU’s Chief Brexit Negotiator, spoke of his concerns that his nation may face “Frexit” if Le Pen, and her choice to be Prime Minister, Jordan Bardella are successful.

The first round of voting takes place this weekend.

The fall in inflation in the Eurozone has unfortunately been matched by a similar fall in economic activity.

The deteriorating eurozone growth trend was led by France, which saw output fall for a second consecutive month and at the fastest rate for five months.

The pan-Eurozone rate of employment has shown steady growth after concerning falls at the back end of last year.

A second rate cut is unlikely to be agreed before the “August Break” and while a September cut is possible, a lot will depend on the path of inflation.

The euro rallied in nondescript trading, as the drivers of G7 currencies are well known. The single currency climbed to a high of 1.0746 but fell back to close at 1.0733 as it failed to test resistance at 1.0750.

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.