29 November 2022: Retail sales volumes are plummeting

29 November 2022: Retail sales volumes are plummeting


  • Brexit is a threat to UK productivity and output
  • Concern over Chinese unrest could bring forward pivot from FOMC
  • Lagarde believes that inflation hasn’t peaked yet
GBP – Market Commentary

Fear of coming recession has hit consumers hard

There are growing fears that the UK political system is rapidly becoming outdated and unfit for purpose. The Conservative Party have been in power for more than a decade despite a catalogue of missteps, the largest of all being their ownership of the Brexit debate.

In the lead up to the vote on the UK’s membership of the European Union, both sides of the argument, with the opposition powerless to intercede due mainly to their failure to agree a policy on the subject. Once the decision to leave was taken, they seem to have gravitated towards the remain cause, simply because it hampers Government decision-making.

There has been very little movement on the Government’s pledge that the country would seek game changing trade deals with several nations, including the U.S. and China. Yesterday, Rishi Sunak spoke of his commitment to building on the UK’s reputation in several growing areas and highlighted the country’s success in developing the Coronavirus vaccine.

However, he also admitted that the golden age of the relationship with China has ended, and any deals will need to be done on a purely commercial basis. The country has failed to take any decisive advantage of its freedom to make deals with nations outside the EU, while its relationship with its largest trading partner has been virtually consigned to the dustbin.

Sunak can bemoan the number of crises that have occurred since Brexit, but the fact is that the Government rushed into leaving without laying the groundwork for its departure first.

The fact of the matter is that the coming recession has been worsened by the haste with which the country cut ties to Brussels and the promise of freedom simply has been unfulfilled and replaced by confusion.

Any effort by the Government to renew any ties with Brussels based around the single market or free movement are doomed to fail, not least because they will reignite the civil war that Brexit drove initially.

Any new initiatives will be hampered by the Government’s need to concentrate on the cost-of-living crisis and rebuilding the economy following the economy, which will take far longer than the length of the current Parliament.

The UK’s predicament is wholly of its own making, and Brussels will no doubt use it as a salutary to other nations who see the grass being greener outside the EU.

Sterling lost ground against the dollar yesterday as the Greenback recovered some of its recent losses, it fell to a low of 1.1940 and closed at 1.1948.

USD – Market Commentary

Expectations are growing that inflation has peaked

Given the chaos caused by the entire transitory inflation comments by Jerome Powell in the summer of 2021, it is difficult the current preoccupation that the financial community has with the possibility of a significant recession hitting the country.

Words like shallow and short-lived are common, while little heed is being taken of the fall in consumer confidence or the slowdown in productivity. There are also several factors coming to the fore, not least of which is the unrest and current lockdowns that are taking place in China.

The relationship between the two superpowers is at a difficult point since Beijing has not yet responded to the continuing ban on the import of Chinese manufactured microchips for use in the security industry.

Jerome Powell will give his first speech since the publication of the minutes of the latest FOMC meeting tomorrow. He will undoubtedly feel a degree of pressure to comment on the committee’s acknowledgement of the lessening of inflation pressures and could appear to take on a more dovish view.

He has spoken in the past of his determination to see the fight against inflation through it to the end and that may be the theme tomorrow, while accepting that the Fed is winning the battle.

Friday’s publication of the November employment report will clearly have some bearing on the FOMC, but a single piece of data, no matter how important, is unlikely to see the Central Bank pivot on its desire to bring prices down.

St. Louis Fed President James Bullard spoke yesterday of his view that the markets are under-pricing the chances of higher rates being seen in 2023. He believes that despite the minutes, there is little sign that the FOMC will be less aggressive as opposed to more aggressive in the first two quarters of the New Year.

The dollar recovered some of its recent losses in the wake of Bullard’s comments. The index rose to a high of 106.74 and closed at 106.68

EUR – Market Commentary

ECB official sees pressure for lowest hikes in 2023

Christine Lagarde gave her strongest and most hawkish speech for some time yesterday, in which she warned against the markets underestimating her determination to defeat rising inflation.

She went on to echo the comments of Robert Holzman, the Austrian Central Bank Head, in which he said there is no sign now that price pressures are lessening.

She went on to say that it is entirely likely that inflation has not topped out yet and the next three months will see increases. The market will now have to accept that interest rates will continue to rise, and jumbo increases should be expected.

She went on to say that her economists at the ECB remain convinced that the risk is without doubt to the upside.

She did however keep her options open as to the number and size of increases, simply because the Governing Council hasn’t discussed them yet, and she is in no position to either pre-empt or second guess their decisions.

The level at which borrowing costs will peak requires sincere consideration, and there is some question whether they have even reached a restrictive level yet.

Speculation remains whether rates will be increased by fifty or seventy-five points at the next meeting, but the hawks will have been encouraged by Lagarde’s comments.

A contrary view was expressed by Gabriel Makhlouf, the Irish Central bank Governor, who commented yesterday that if rate increases are needed at all next year their increments will likely be smaller. It is extremely difficult to judge the effect of rate increases when they are so large as to have an immediate effect, he said.

The Euro fell back to a low of 1.033 and closed at 1.0335 as the market digested such contrasting views.

The next meeting of the ECB take place in a couple of weeks, and it seems that there are widely contrasting views and any decision that is taken is unlikely to please everyone

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.