25 September 2023: Sunak is looking for vote gaining initiatives

25 September 2023: Sunak is looking for vote gaining initiatives


  • Government indulging in short-termism to gain a foothold before the election
  • Shutdown a significant issue for the economy
  • Eurozone’s economy failed to pick up in the third quarter
GBP – Market Commentary

HS2 expected to be scaled back again

Following last week’s watering down of the Government’s green agenda, the Prime Minister is believed to be considering looking at other long-standing initiatives to save money, possibly with the motive of being able to provide the funds for Jeremy Hunt to deliver tax cuts in his Autumn Statement that will be delivered to Parliament in a little more than a month’s time.

There are believed to be changes to the incredibly expensive HS2 project that will save several billion pounds.

It is understood that the extension to the line that was planned to take place linking Birmingham and Manchester as well as making its terminal in West London, rather than Euston, are under threat.

Andy Burnham, the Labour Mayor of Manchester spoke yesterday of his belief that the Government’s levelling up agenda is on the verge of being abandoned as it realises that it is unlikely to win seats in the “red wall” constituencies that turned the tide for Boris Johnson in 2019.

With the election looming, Rishi Sunak still feels that his Party has a chance of retaining power, although that still looks to be a forlorn hope.

The Government is sure to be accused of short-termism by the Opposition for trying to make vote winning changes to long-established projects to deliver a feelgood factor to the electorate.

Last week’s pause in the cycle of interest rate hikes by the Bank of England has created a more positive degree of expectation among mortgagees, as well as businesses connected to the housing market.

The Governor of the Bank of England, Andrew Bailey, made no mention of whether this is the end of the programme of hikes or if the MPC is simply allowing the economy to catch up.

This week the final cut of GDP for the second quarter will be published. It is expected that the data will show that the economy grew by just 0.4% in the period between April and June. This is unchanged from the previous figures and will indicate that the economy barely produced any growth at all quarter-on-quarter.

It is now a year since the calamitous Autumn Statement delivered by Kwais Kwarteng on behalf of then Prime Minister, Liz Truss. Parliament is unlikely to see such a radical set of proposals this time around, but it is possible that the Government may be setting itself up to prepare for an election.

Last week, Sterling extended its recent weakness versus the dollar into what looks like a trend. It fell to a low of 1.2230 and closed at 1.2240.

USD – Market Commentary

Rising unemployment and falling inflation will encourage another pause

Jerome Powell, being a lawyer, has used his experience in the courtroom to provide a completely fresh perspective to the delivery of monetary policy.

This has allowed him to face the issues of rising inflation and anaemic levels of growth with a clear mind. It has led him to be more hawkish than several of his colleagues, but overall, the FOMC appears to have its policy decisions about right.

There were plenty of calls for rate hike to be paused, or even stopped, before the first pause took place in June while the second pause that was agreed last week was a “no-brainer” given the falls in inflation that have taken place recently.

It may be that a soft landing where the Central Bank manages to tighten monetary policy just enough to be able to control inflation without damaging employment and output, is little more than a “dream scenario” since one entirely dictates the other.

It may be that a soft landing can be declared to have happened in retrospect but as an ongoing position it is almost impossible to achieve.

Although it feels like Central Bankers use their attention to the economic data that is released on a monthly basis as a “get out” to often justify their actions, while at other times they comment that they will choose a certain path in the future “dependent on the data, the Fed has now reached a position when it can truly say that it is data dependent.

Short term interest rates are at a stage where another hike could be agreed should inflation fail to fall when the data for September is released in a week or two, while should growth be seen to be faltering, another pause could be agreed.

The only issue for FOMC members is that the economy is that such events are tending to be regional when the Midwest is performing poorly due to the proposed strike by the UAW, while the more western states of California and Washington are seeing the benefit of new innovation and tech advances native to that area of the county.

This week the Fed’s preferred measure of inflation is due for release. The data for Personal Consumption Expenditures is expected to be unchanged from a month ago as fuel prices continue to climb.

The dollar index reacted well to last week’s pause despite another tightening from the ECB. The index climbed to a high of 105.77 and closed at 105.58. The high for the year is at 105.88, and there is little reason to doubt that will be exceeded this week.

EUR – Market Commentary

The ECB President is left “Holding the Baby”

It is doubtful that Christine Lagarde was accepting responsibility for the entire Eurozone economy when she agreed to become President of the European Central Bank, but that has been her fate since the ineffectual Ursula von der Leyen took over from Jean-Claude Juncker.

As well as deciding, or at least driving, monetary policy for the twenty individual nations of the Eurozone, she has been left to decide the entire economic policy since there is no fiscal union.

Leaving every country to decide its own levels of taxation and expenditure has been worsened since the already loose growth and stability pact was abandoned during the pandemic.

At least under that agreement countries bore some responsibility for the debt to GDP ratios and budget deficits. Now certain less financially disciplined countries have figuratively “run riot.”

The abandonment of the growth and stability pact has meant that any tightening of Eurozone monetary policy can be offset by changes to domestic fiscal policy.

That has led to the ECB needing to tighten policy more than it has need to since the effectiveness of rate hikes has been, in some but not all cases, watered down.

Last week’s rate hike was clearly a close-run thing, with several Eurozone member nations believing that they are facing or are already in a recession.

While it claims to be data driven, the ECB is not yet in the position that is now enjoyed by the Fed, in that its monetary policy decisions can be truly dependent on the economic data published on a month-to-month basis.

Furthermore, the fact that the market still takes notice of an individual nation’s performance makes the ECB’s ability to decide policy for the entire region that much more difficult.

This week, there is a slew of data set to be released for Germany, and this will prove of greater importance than Eurozone wide figures.

Banque de France President Villeroy commented over the weekend on concerns over the rise in the oil price. He said that he believes that its current level, the price of a barrel of oil, has negligible effect on the ECB’s view on inflation.

Last week, the euro fell further despite the further closing of the gap between U.S. and Eurozone interest rates.

It fell to a low of 1.0615 and closed at 1.0647.

Have a great day!

Exchange Rate Year Featured

Exchange rate movements:
22 Sep - 25 Sep 2023

Click on a currency pair to set up a rate alert

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.