25 March 2024: Sterling suffers a “tough week”


  • Will the economic improvement be too late for Sunak?
  • Biden tells a more positive story about the economy than is seen on the ground
  • Lagarde tells Brussels a more positive story about the economy
GBP – Market Commentary

Hunt commits to the triple lock on state pensions

The clear implication of Andrew Bailey’s press conference following last week’s Monetary Policy Committee meeting was that the Bank of England is close to feeling able to cut interest rates.

The headline rate of inflation has consistently fallen since the start of the year, which is a condition that Bailey set out in a previous speech.

This was the first meeting in two years when no member voted for a rate increase. Catherine Mann, the Committee’s “resident hawk,” “celebrated” her reappointment to the committee by voting for no change, as she was close to doing in February.

The only dissenting voice came from Swati Dhingra, who continued her “campaign” for rates to be cut immediately since she believes that the economy may be headed for a hard landing where inflation falls well below the Bank’s 2% target.

Now that the three most influential Central Banks with the G7 have held their March meetings, the Bank of England has taken over as the one expected to cut rates first.

The Prime Minister has continued his insistence that the economy has turned a corner since the year, but his view is based solely on anecdotal evidence, even though the recession that began at the end of the last quarter appears to have ended as soon as it began.

Nonetheless, any economic upturn will likely arrive too late to save his Party from a crushing defeat whenever he decides to call a General Election.

There is a significant difference of opinion developing in the media about the ability of Rachel Reeves, the Shadow Chancellor, to turn the economy around as and when she takes over from Jeremy Hunt.

Last week, she attempted to lay out the Labour Party’s unofficial manifesto for her first year in office, but her plans have been labelled as little more than a continuation of what Jeremy Hunt is already attempting.

Jeremy Hunt confirmed over the weekend that were the Government to be re-elected, his Party would retain the “triple lock” on the state pension that guarantees that it will rise by the higher of inflation, average earnings and 2.5% each year.

Labour’s commitment to the triple lock is less watertight than the Conservatives, but this is a policy that is supported by “traditional” Conservative voters.

The pound suffered from the market’s impression that rates could be cut as soon as the next MPC meeting. It suffered its biggest weekly fall since early December, reaching a low of 1.2575 and closing at 1.2601. It is unlikely to receive any support from Central Banker’s comment in the short to medium term since each has now made its position on rate cuts evident.

Catherine Mann is scheduled to speak later this morning. She will set out her reasons for abandoning her vote for a rate hike. This won’t provide any relief for the pound. With the next two weeks being shortened by the Easter Holiday, there is tier one data due for release other than a confirmation of the fact that the economy fell into recession in Q4 2023.

USD – Market Commentary

By the time the election happens, rates will be much lower

Following last week’s FOMC meeting, the Fed gave as clear a message as it has at any time since it ended its programme of rate hikes of its intentions regarding interest rates.

Although there are still those who see the economy as at risk of a period of contraction or even stagflation, the evidence from forward-looking leading indicators remains positive.

The latest employment report showed that the economy is still creating significant numbers of jobs, even if the significant downward revision in the January headline number “raised a few eyebrows.”

Output and productivity are still in positive territory, while overall the monthly GDP numbers are positive. Jerome Powell has been at pains to stress that the objective of the FOMC is to bring inflation down to its 2% target while allowing the economy to grow and job creation to remain positive.

It makes sense that with interest rates at the highest they have been for a considerable time, there would be some negative effect on demand, but it does seem that the Committee has pitched the pause in rate hikes at the right level.

Those who are concerned that the FOMC will need to cut rates significantly in the coming months have been “disappointed” that the economy is still on a positive trajectory.

Just as the Bank of England “set out its stall” for a rate cut as soon as May, the latest FOMC meeting has pushed the market’s expectation for a rate cut back to September.

Powell may well have inadvertently provided a boost to the political campaign of President Biden. The FOMC will be amid its rate-cutting when the Presidential Election takes place. The November meeting will take place the day after voting.

The confirmation of Q4 GDP data will be released later in the week, as will the current numbers for PCE inflation. It is expected that the rise in Personal Consumption Expenditures will remain unchanged at 2.8% in February.

In his recent speeches, Powell has said on many occasions that the path lower for inflation won’t be linear, and that is one reason why the Fed is comfortable leaving rates unchanged for a significant period.

The dollar index has received a boost from the view that rates will remain unchanged, until September. Last week, it reached a high of 104.49 and closed at 104.43.

EUR – Market Commentary

The ECB will almost certainly cut before the Fed

The race to be runner-up to the Bank of England in the “rate-cutting” race now has a clear favourite.

Although it has been a few weeks since the most recent meeting of the Central Bank’s Governing Council, comments made since then by several officials have not deterred the view that provided the Q1 wages data shows that salaries are continuing to fall at roughly the same pace as inflation the ECB will agree a cut in rates.

When questioned last week, ECB President, Christine Lagarde, was unwilling or unable to commit to how many cuts in rates there would be or what their scale would be.

The ECB President is willing to almost promote the level of volatility that market uncertainty would see due to a high degree of uncertainty.

Lagarde did, however, speak in more opt Christine Lagardethe outlook for the Eurozone economy, despite recent evidence to the contrary. Central Bankers have a “knack” of seeing a different story regarding “rear view mirror” data and whether it suits their narrative.

Lagarde chose to ignore the fact that the industrial Production “collapsed” in January, instead looking forward to a more positive period ahead. In a speech to the European Parliament in Brussels, she “promoted” the only real positive that she could highlight.

Inflation in the region is indeed falling faster than even the most optimistic observer expected. Still, she avoided mention of the cost that tighter than necessary monetary policy has had on output and demand.

Lagarde emphasized the importance of enhancing economic flexibility within the eurozone, highlighting the need for increased productivity, which, in turn, necessitates higher levels of investment. It is time that she practised what she was preaching since the road to economic flexibility and increased productivity will start with a cut in interest rates.

Eurozone Manufacturers are complaining that they are facing a “perfect storm of obstacles.” They constantly complain of excessive regulation, Chinese competition, or the American economy’s ability to produce productivity increases at will.

It is becoming obvious that once the ECB has embarked on its easing of monetary policy, there will need to be a programme of rationalization to ensure that the region remains competitive.

The Euro is still in the thrall of the dollar and is struggling to remain above its medium-term support level. Last week, it fell to a low of 1.0801 and closed at 1.0808.

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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.