26 January 2022: Anticipation grows over Gray report

Anticipation grows over Gray report

26th January: Highlights

  • IMF calls for energy support
  • IMF downgrades U.S. growth expectations
  • IMF expects Eurozone to struggle to find meaningful growth in 2022

Police also investigating Downing Street parties

The air of anticipation that is growing around Parliament has been ramped up further as it was announced yesterday that the Metropolitan police are looking into the events that took place in Downing Street during the first lockdown.

The report that is being written by the country’s senior Civil Servant, Sue Gray, is due for publication in the next few days and the feeling is growing that Boris Johnson’s days may be numbered.

Johnson faces further ridicule from the Opposition Parties as he takes Prime Minister’s Questions in the House of Commons later today.

If the internal report is anything like as bad as is being speculated about, the police investigation, even if fines are issued, will be something of an anti-climax.

The IMF produced its latest World Economic Outlook yesterday. It downgraded its prediction for full year growth in the UK from 5% to 4.7%, citing the increase in energy costs and the lingering effect of Omicron as its main reasons.

Even after the cut in GDP, the UK is still expected to see the strongest growth of industrialized nations. This has more to do with the size of the contraction in activity the country saw during the first lockdowns in 2020 than any other reason.

The IMF believes that if the full extent of the rise in the wholesale cost of gas is passed on to the consumer, then the Government will be forced to consider further support for families.

One positive for the country is the fact that Brexit Remainers appear to have got it wrong in claiming that leaving the EU would have a damaging and lasting negative effect on the country.

Despite the fact that the world leading financial sector has been battered by the Pandemic, leaving the usually bustling areas of the City of London and Canary Wharf often looking deserted, services output remains healthy.

Working from home has had a significant effect on the businesses, such as cafés, bars, and retail outlets, which rely on customer footfall, but the major banks and financial services companies are thriving.

The pound is beginning to feel the full force of the dollar’s current rise, even though that strength currently has more to do with a flight to safety than any particular desire to buy the Greenback. Yesterday, Sterling fell to a low of 1.3435, but recovered to end the day slightly higher at 1.3509.

With the FOMC meeting concluding today and no major data due for release in the UK, the pound is likely to be in a reactive mode for the rest of the week. However, there may be a reaction if the Gray report is damning for the Prime Minister.

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Inflation expectations see prices falling in medium-term

Consumer confidence in the U.S. is still reasonably buoyant, despite fears that the Omicron Variant is hanging around for longer than had been expected.

This is something of a change from early January when less was known about Omicron and the Fed was struggling to come to terms with the continued rise in prices.

Although the data for consumer confidence in January was a little lower than it was in December, this reflects the short-term view, while there is growing confidence that the U.S., will emerge from the Pandemic sooner than had been predicted.

Consumer confidence has diverged slightly from the current situation. In the short-term, consumer spending is being hit by the pandemic and rising inflation. However, online sales continue to be strong.

Employment remains positive for the consumer. More than 55% of those surveyed believe that jobs are still plentiful. While this is a slight fall from December, the data stays close to historic highs.

It is hard to predict what emphasis Jerome Powell will use when he delivers his statement following the conclusion of the FOMC meeting later today.

If he is still as hawkish as he has been following the two most recent meetings, fears may grow that the brakes are being applied a little too vigorously. While, if he acknowledges the remaining challenges to growth, the market may feel that the Central Bank has become less serious about tackling inflation.

The IMF report released yesterday acknowledged the renewed challenges that face the world’s biggest economies and downgraded its growth expectations for both the U.S. and China.

Global growth is expected to rise by 4.4% in 2022. That is 0.5% lower than previously forecast. The U.S. is predicted to grow at 4% that is a full 1.2% lower than previously predicted.

The dollar index is struggling to keep momentum following its recent correction. Yesterday, it rose to a high of 96.27 but was unable to hold onto gains and slipped back to close at 95.99.

Following the FOMC meeting, there are some significant data releases due tomorrow and Friday. Producer Prices, Durable Goods Orders and Weekly Jobless Claims are due tomorrow, with Personal Consumption Expenditures due on Friday.

Omicron lingering longer than expected

Industrial Output in the Eurozone is still weak, and in its report released yesterday, the IMF downgraded its prediction for full year growth for 2022.

Despite the historically elevated level of support still being pumped into the economy, growth is expected to be 3.9%, down from 4.3% in its most recent report.

The Omicron Variant continues to be a significant drag on activity, despite the growing feeling that it is ending.

There are growing feelings that the Eurozone is now split in two economically. Czechia, Bulgaria and Croatia are all working towards EU membership, but it is uncertain of the benefit that they will reap from joining.

The straitjacket that was being applied pre-Pandemic and that is sure to return once Coronavirus is consigned to history may not bring the benefits that were being anticipated pre-Pandemic.

There is no doubt that the Eurozone will be a different place once the economy returns to normal. The rise of a more expansive set of economic policies will be tough to maintain as the realities of the effect of the support that has been handed out become clear.

The ECB is going to be left with a bloated balance sheet, unable to withdraw from an unprecedented level of state support. The return of the debt to GDP ratio and the 3% cap on budget deficits may be almost impossible to achieve.

There are clearly some difficulties ahead, even without the pressure that is going to be exerted by continued Russian moves towards greater hegemony over its previously controlled satellites.

The situation in Ukraine is still tense, with Russia massing more troops on the border.

It is impossible to gauge the next move from President Putin as he ramps up pressure by blaming NATO and its members for creating the issue in the first place.

Any move towards weaponizing the supply of gas will see the euro suffer even more. Economically, it will send inflation even higher as the price rises even further. Politically, it is likely to weaken the bargaining position of the Eurozone.

Yesterday, the single currency fell to a low of 1.1263 but recovered to close at 1.1304 as traders adjusted positions ahead of the FOMC meeting.

Have a great day!
About 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.”