27 February 2023: Hunt has substantial wiggle room


  • Hunt receives £10 bln budget boost
  • Buffett bullish on economy doubt business leaders concerns
  • Falling inflation unlikely to deter ECB
GBP – Market Commentary

Budget likely to be more expansive than expected

There is a growing level of anticipation that Chancellor Jeremy Hunt will be able to be significantly more expansive in the budget that he will present to Parliament on 15th March.

He will have far more wiggle room and will now have several choices to make, where recently he was expected to have little choice to do anything other than stave off the country’s likely fall into recession.

The sum of money that Hunt will have at his disposal following the almost miraculous recovery since the start of the year is reported as being ten billion pounds, although there are some in the press who put the figure at twenty-five billion.

It will be a major bonus for Hunt to have choices when he sets out the fiscal policy for the next year. Having already committed to retaining the triple lock on state pensions which means that they will rise by the highest of inflation, average wages, and 2.5%.

Following the significant rise in inflation, pensioners will receive a 10% increase in their pension in April.

Sir Keir Starmer, the leader of the opposition, set out his five point wish list for issues the Labour Party to tackle if, or most likely when. It wins the General Election that has to take place by January 2025. Far and away the most far-fetched of his missions is to make the UK the fastest growing economy in the G7.

While his other goals were laudable and, in truth, were hardly earth-shattering, they lacked any detail as to where changes will be made. Starmer will make a speech later today, in which he is expected to add some meat to the bones of his proposal.

The costing of his plan will be interesting to several government agencies, but the Shadow Chancellor Rachel Reeves has already said any fiscal issues will be fully funded.

The Prime Minister has put a significant amount of time into reaching an agreement over the issues that have faced Northern Ireland over Brexit. Today he will meet EU Commission President Ursula von der Leyen to finalize the agreement.

With an agreement all but complete, Sunak faces the difficult task of selling it to the Unionist politicians in Belfast and his own backbenchers. The fact that Brexit is still being talked about is one of the more telling indictments of the current government.

Last week, the financial markets were in a state of flux as the control of Central Banks became almost total.

Sterling fell to a low of 1.1928 versus the dollar and closed at 1.1948. It will need to climb above 1.20 in order to gain any momentum.

This week there is no tier one data due for release, but speeches by MPC member Ben Broadbent and Bank of England Governor Andrew Bailey may provide a degree of insight into the Bank’s intentions towards monetary policy.

USD – Market Commentary

Plans talks with Republicans over deficit reduction

Janet Yellen, has had a far easier ride as Treasury Secretary than she did as Chairman of the Federal Reserve, despite the fact that, as Chairman, she faced none of the challenges that have faced Jerome Powell.

Her generally low-key demeanour has allowed a strong link to be forged between the Central bank and the Administration.

Having the ability to look at the wider picture has allowed her to maintain her view that it is by no means likely that the country will fall into recession this year. In fact, in a recent speech she maintained her view that the actions of the Federal Reserve are likely to achieve a soft landing for the economy, despite the fact that inflation remains stubbornly slow to recede.

Attending the G20 summit that took place over the past few days, Yellen called upon the world’s developed nations to join together and condemn Russian aggression in Ukraine.

On the domestic front, she will start talks this week with Senate Republicans over the fiscal deficit. She has set out the parameters for the talks, in which she will discuss deficit reduction but not as a condition of raising the debt ceiling.

Investment guru Warren Buffett’s Berkshire Hathaway Group saw a 14% drop in income in the fourth quarter of 2022, but Buffett himself disagrees with several bankers and business leaders regarding a recession. Although he sees a bumpy road ahead, he expects growth to be seen in 2023 with a significant improvement in 2024.

The dollar index rose last week as the minutes of the latest FOMC meeting showed that although the result of the meeting was more dovish than expected, there were a number of members who voted for a fifty basis point hike.

The index rallied to a high of 105.23 and closed at that level.

Given the way this month has worked out, the March employment report will not be published until March 10th. This will still give the FOMC sufficient time to digest it fully before their next meeting.

This week’s schedule for tier one data includes the release of durable goods orders today, ISM manufacturing data on Wednesday, while the jobless claim’s data due on Thursday have taken on a greater significance of late.

EUR – Market Commentary

Rate hike to continue at least until Summer

Although the market appears to have got over Christine Lagarde’s departure from protocol to provide significant advance guidance to the financial markets of the ECB’s intention to hike rates by a further fifty basis points at its next meeting, the fact remains that since inflation is not falling as fast as either her colleagues on the Governing Council predicted, the Central bank will not be in a position to wait and see at subsequent meetings.

That means that the ECB will probably have to raise rates at least two more meetings after March, which may dent the recovery of the Eurozone but is still unlikely to tip the region into an overall recession.

A contraction in the Italian economy in Q4 will mean that it will see a recession in the first half of this year, but, as long as the ECB tempers the fate of its hikes over the next few months, the situation won’t be exacerbated. While the German economy also contracted, by 0.4% in Q4, it is already seeing a rebound in Q1 that isn’t being seen across the entire region.

The greatest fear in the region currently is the size of an expansion in the war in Ukraine. As spring comes, it is likely that Russia will launch an offensive to retake ground that Ukrainian soldiers have taken back over the winter.

There is no doubt that there will be shortages of several foodstuffs that are usually plentiful from Ukraine, and this will see inflation remain stubbornly high.

Inflation data for the Eurozone will be released later this week, with the expectation that the headline will fall only marginally to 8.5% from 8.6% in January.

The euro has shown a steady decline over the whole of February, with the only up week seeing only a moderate degree of strength.

As expectations rise for the ECB to remain hawkish for longer, the single currency should see a turnaround in its fortunes. Given that Lagarde has already let the cat out of the bag regarding the ECB’s intentions, a lot will depend on the FOMC and if they clarify their own inversions.

Last week, the euro fell to a low of 1.0537 and closed at 1.0548. It is supported at around 1.0480 and is unlikely to test that level no matter the outcome of the inflation data.

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.