29 May 2024: A June rate cut is “dead in the water”

29 May 2024: A June rate cut is “dead in the water”


  • 121 Business chiefs vow to support Labour
  • PMIs show global growth is improving
  • Wage growth is making the ECB nervous
GBP – Market Commentary

Ex-MPC member sees multiple reasons for a further delay

Rachel Reeves, the Shadow Chancellor of the Exchequer, said yesterday that the Labour Party is the “Party of Business”. This comment was in response to the news that one hundred and twenty-one business leaders had signed a joint letter of support for the current Opposition.

In what is becoming a trademark, she failed to say why she believes this. It seems that The Labour Party has become extremely wary of any form of commitment which may be able to be “picked apart” by the conservatives.

It is as if they believe that they simply need to avoid banana skins to win the election. One such concern was the charges faced by deputy leader Angela Rayner, the Party’s outspoken Deputy Leader. Rayner has been accused of breaking electoral law about her living arrangements, and not declaring the profit she made from selling a former council-owned property that she owned.

Although the police have confirmed that they have ended the inquiry into electoral law, it is unclear if they have also finished the investigation into the potential tax evasion.

Since it was the Conservative Party which raised this issue originally, it is doubtful that they will allow it to rest if there is even the smallest chance that they can make political capital.

The Labour Leader, Sir Keir Starmer, has provided total support for Rayner during the investigation which had, and possibly still has the potential to be more than an unwelcome distraction for Labour.

It appears that the Conservative Party is announcing a new policy every day. Yesterday’s offering was “triple lock Plus”, an upgrade on the policy which guarantees that the state pension will rise annually by the lowest of the rate of inflation, average earnings and two and a half per cent.

They have now added a rise in the threshold at which those on the basic state pension will pay income tax. There had been concern that as the basic state pension increased it would move above the threshold, meaning that pensioners would pay tax on a small part of their income. That has now been removed and will remain at a level which avoids taxation in perpetuity.

The IMF has announced that it expects the UK to achieve a soft landing over the rest of this year despite political uncertainty, due to its more rapid than expected from the shallow recession it experienced at the end of last year, together with the pace of growth since.

This is good news for the Government, although it will need to do more than lean heavily on the nascent recovery if it is to make up the gap between it and the opposition in the polls.

The pound attempted to break the 1.28 level yesterday but appeared to run out of steam. It made a high of 1.2801 but fell back to close at 1.2750.

Should the Conservatives not close the gap in the polls in the coming weeks, Labour will get a far greater sign if it is indeed the Party of Business from the reaction of the pound to a potential Socialist Government.

USD – Market Commentary

Wages are still rising at a rate above inflation

The release of PMI activity in the U.S. and Europe shows that economic activity globally is moving close to its historical average.

This shows fears that the strength of the dollar, which is predicted to continue as rates are cut in both the UK and the Eurozone, is not inhibiting global trade.

There were contrasting reports published yesterday about the strength of the U.S. economy. Consumer confidence recorded its first increase in four months, as workers believe that the jobs market is more resilient than was feared earlier in the year, while their incomes are being less affected by inflation.

However, Gary Kaltbaum, an independent fund manager and market commentator, focussed on the demand for a thirty per cent pay increase over four years being requested by the Union of Auto Workers as a potentially significant driver of rising inflation and, potentially, tighter monetary policy.

Kaltbaum often appears on Fox News, which is a well-known “mouthpiece” for Trump supporters, so this may be a little more political electioneering.

The Trump publicity “machine” is beginning to gather pace as he approaches the end of his trial for misleading tax authorities and approaches his nomination as the Republican Candidate to Challenge President Biden in the November Election.

The Republican convention takes place in the middle of next month, which will give Trump a head start over Biden since the Democrat Convention doesn’t take place until late August. That is, of course, providing that Trump isn’t in jail by then.

The Fed is unlikely to help Biden’s cause either since the FOMC is now considered unlikely to cut rates before the Autumn and reduce the number of cuts it will make this year.

Loretta Mester, the President of the Cleveland Fed, delivered a considered critique of recent Fed policy statements. She spoke of the need for a greater explanation of economic assessment which directly affects monetary policy decisions. She believes that there is a void between what is said by FOMC members at six weekly meetings and the impression of the decision-making process that is revealed to the market.

She went on to say that the use of nuanced language, where a change of the odd word here and there is considered to have greater than necessary influence, is unhelpful.

The dollar index gained yesterday as a cut in the Eurozone interest rates moved closer, as a similar change in the U.S. remained unclear. The dollar rallied to a high of 104.64 and closed at 104.63. Although the May employment report will have some effect on the dollar’s direction, next week will be dominated by the ECB meeting at which the rate cut is set to be confirmed.

EUR – Market Commentary

The Eurozone is pushing back against trade restrictions

So far this year there have been several occurrences of divergence in the developed economies both individually and within the G7 Group of Industrialized Nations.

The latest is the disagreement over China that is happening between the U.S. and the Eurozone.

While the U.S. is “going down the route” of increased tariffs on a small but specific sector of its imports from China, the Eurozone is collectively trying to foster greater cooperation and sees opportunities to increase its exports to China by reciprocation, particularly in the automotive sector.

ECB Executive Board Members, Schnabel and de Guindos have both spoken recently of their concerns that wage growth which was considered as the “great stumbling block” to rate cuts in the Eurozone is still “too high”, particularly in Germany.

However, they have both endorsed the rate cut that is now considered certain to happen next week, although they have been strident in their view that the first rate cut should not open the door to further easing of monetary policy without due consideration.

Schnable and de Guindos have both cited recent data releases as a reason for caution, but their concerns may backfire on them since, apart from wage growth which is only excessive in Germany, the level of economic activity shows that the region is “crying out” for a for monetary policy to be eased by between seventy-five and a hundred basis points this year.

Expectations for inflation have also reached their lowest level since 2021. However, there is some need for caution since the average rate of inflation in the next twelve months is 2.9%. Down from 3% when the survey was last performed in February.

This may well excite the hawks on the ECB’s Governing Council to be less forthcoming when considering the level of cuts they will agree to.

The ECB along with other G7 Central Banks may have to seriously reconsider their inflation targets since even long-term projections only see inflation an average of 2.5% on a three-year horizon.

The euro made yet another attempt to breach resistance at 1.09 yesterday. Not only did it fail, but it attracted substantial selling interest that drove the single current down to a low of 1.0854 which was where it closed.

With the rate cut now just over a week away, and Parliamentary elections taking place between June 6th and 9th, next week may well see increased volatility across the financial markets.

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.