26 January 2024: The first-rate cut is slated for June

26 January 2024: The first-rate cut is slated for June


  • Labour’s plans will make little difference to growth in the medium-term
  • The U.S. economy surged in Q3
  • Lagarde labels rate cut talk premature
GBP – Market Commentary

A recession is likely to be avoided, but the economy needs a “shot in the arm”

Economists at the Institute for Fiscal Studies believe that although there may be a “honeymoon period” during which there will be a feelgood factor generated by the first change in government for fourteen years, the overall effect of a Labour victory in this year’s General Election will not make a significant difference to the economy based solely on policies alone.

The weak level of growth that is forecast together with the elevated level of interest that will still have to be paid on government debt will remain no matter the result.

The tax cuts which have been alluded to by Jeremy Hunt in several recent speeches are little more than a bribe to the electorate and would be unlikely to happen were there not an election taking place.

It may very well be that there will only be room for the initial cuts that are going to be delivered in the Spring Budget since there is a real doubt that any further “giveaways” will be possible.

The strain on public services is already taking its toll. The short-term positivity that is currently being felt given that the state of public finances should allow Hunt to reduce the basic rate of income tax by one per cent in March, but, in truth, the additional funds would be better spent elsewhere.

The Labour Party is pinning its hopes on the removal of non-Dom tax status, but a closer review of its (tentative) plans shows that the windfall created has been spent at least twice, if not three times.

No matter the victor, a slow-growing economy will not produce the increase in tax revenue necessary to maintain public services while spending on items like social benefits and funding the NHS will likely rise given that unemployment is set to rise, although not significantly.

The IFS urges both sides to come clean about the challenges they will face in the coming years if elected, but that plea will no doubt fall on stony ground.

The Bank of England’s Monetary Policy Committee will meet next week, and there is little doubt that interest rates will remain unchanged since the two or maybe even three factions that have risen over the past year will remain.

The five permanent members will still consider themselves to be “data-driven” while of the four independent members, three, Catherine Mann, Jonathan Haskell and Megan Greene are considered hawks, and Swati Dhingra has exhibited a more dovish opinion since joining the committee in late 2022.

Following the election, whether Rachel Reeves or Jeremy Hunt becomes Chancellor, the makeup of the MPC is likely to be the subject of a review.

Sterling is still unable to make any headway to the upside against the dollar, while its downside is protected by the market’s view on the timing of the first interest rate cut.

It fell to a low of 1.2681 yesterday but rallied to close just ten points lower at 1.2706.

USD – Market Commentary

The market predicts that the first cut will take place in Spring

The first cut of fourth quarter GDP was published yesterday, and it showed that the economy is forging ahead, paying little heed to the level of short-term interest rates which are supposedly in restrictive territory.

The economy grew by an impressive 3.3% between October and December.

With the unemployment rate at a low level, and the increase in average earnings still above the headline rate of inflation, it is doubtful that the FOMC will feel the need to reduce the Fed funds rate for two or even three further meetings.

The economy is outpacing fears of a downturn this year and will hasten the arrival of the long-predicted soft landing.

There were several reasons for the increase in growth, which bodes well for the future. The rise was spread across business investment, public spending and increased exports.

With consumer spending and retail sales still performing above average, the Fed still has more than enough wiggle room to be able to remain data-driven for at least the rest of the first quarter.

Wages and falling inflation are still the major drivers of the consumer and while the rate of change in both is beginning to slow, that is only to be expected at the current point in the economic cycle.

There was a significant increase in the number of jobless claims when the weekly data was published yesterday. Initial claims rose to 214k from a marginally revised figure of 189k, the previous week, although the four-week average fell slightly.

This may attract the market’s interest since it is the first time there has been a meaningful change in the data since the end of the Fed’s cycle of interest rate hikes.

Likely, any lingering concerns about a recession have finally been put to bed, and soon the market will start to consider the economic effect of the outcome of the Presidential election.

With the two protagonists now almost certain to be the incumbent, Joe Biden and the former President Donald Trump, the outcome is likely to be as close as it was in 2020, but hopefully without the scenes that marred Biden’s victory.

The dollar still looks poised to make significant gains, and it is a mystery why it has not been able to cast off the shackles.

Yesterday, the index rose to a high of 103.68, but ran out of steam and retreated to close at 103.48.

EUR – Market Commentary

The single currency is struggling despite rate support

There was no surprise delivered by the ECB as it met to set the level of short-term interest rates for the first time this year.

In her press conference that followed the announcement, ECB President Christine Lagarde reconfirmed her view that talk of rate cuts is still premature.

She confirmed that the rise in wage growth continues to slow, but this was her only concession to a more dovish outlook.

She confirmed that the disinflation process is at work. Disinflation is the slowing of the rate of the fall in inflation and differs from the overall fall in inflation that the ECB has been trying to achieve for the past eighteen months.

With the level of interest rates staying unchanged since the Autumn, it is to be expected that disinflation will be slowing.

There was still no “victory speech” about the war against inflation, which led the market to believe that the Governing Council retains an overall hawkish outlook.

Lower profit margins have suggested companies were absorbing increased labour costs rather than passing them on to consumers by raising prices. This has led to a fall in the core rate of inflation.

Over the next week or so, the market will be prepared for several Eurozone Central Bank Heads to express their views on the discussion that took place and supply their spin on the future path of interest rates.

Lagarde issued a veiled criticism of the market’s expectations around interest rate cuts. It is obvious that she feels that pressure is being exerted on the ECB to cut interest rates when the Bank has made it clear what its criteria are and that applies whether rates are rising, falling or as is the case currently remaining unchanged.

Given that there are clear disagreements within the Council about the path of interest rates, the fact that Lagarde tries to “speak with a single voice” does little to dampen speculation.

Next week will see the publication of fourth quarter GDP data, and the best that can be hoped for is that the economy continues to flatline.

Consumer and business confidence data is also due for release and while they are unlikely to show any meaningful gains, there is a possibility that economic confidence will improve as falls in output seem to have bottomed out.

The Euro is still feeling pressure from the growing gap between the economic performance of the U.S. when compared to the Eurozone.

It fell to a low of 1.0821 yesterday and closed at 1.0840.

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.