29 September 2023: Bailey keeps his powder dry


  • SMEs see Labour as their best chance of survival
  • Dollar index running out of steam
  • German economic slump may be worse than first feared
GBP – Market Commentary

Rates hikes are still on a knife edge

A report published this week showed that proprietors of small and medium enterprises believe that they would be better supported under a Labour Government than under the current administration.

The report by Bibby Financial Services found that overall confidence in all the political parties is currently low but Labour have more business-friendly policies.

The Government hasn’t delivered a Brexit deal that allows exporters to explore new markets, while red tape and bureaucracy remain significant obstacles to growth and profitability.

Inflation and spiralling interest rates have been the most significant challenges identified in the survey that went with the report, while overall businesses feel that the Conservatives have become “used” to being in power and Finance Directors believe that under Labour an original approach will create greater opportunities.

Another report, this time by Lloyds Bank showed that business confidence slipped further in September, to complete a dismal quarter. There are now genuine signs of a real slowdown in activity and the rise in unemployment is causing concern that the Bank of England acted too late in pausing its programme of interest rate hikes.

Interest rates have now definitely reached the point where they are restricting demand, and this is reverberating throughout the economy.

The report on business confidence didn’t particularly reflect the poor PMI indexes that were issued earlier, but there is enough doubt about the economy overall to stoke fears of a recession.

There is a chance that the Bank may be forced to deliver an interest rate cut as soon as the first quarter of next year, but overall growth is still expected to remain positive but close to zero up until the election.

This week’s report of the possible scaling back of HS2 along with changes to the Government’s “green agenda”, have also seen confidence take a hit, as it is indicative of a switch from being business friendly to an attempt to woo voters ahead of the election.

Next week, sees the normal release of output data that is published in the first week of the month. That, accompanied by housing market data will give a better picture of the strength of the economy.

This week has seen Sterling driven lower by a dollar that is going from strength to strength although yesterday saw a minor correction. The pound rallied to a high of 1.2224 and closed very close to that level. The improvement is seen as temporary since the Fed is seen as being more initiative-taking than other G7 Central Banks and more likely to raise rates again if inflation begins to pick up again.

USD – Market Commentary

Barkin sees no barrier to higher rates if needed

The Fed’s favoured measure of household outgoings, Personal Consumption Expenditures, is due for release today with the data expected to show a rise from 3.3% in August to 3.5% this month.

It is unlikely that the data will have any lasting effect on the FOMC’s possible decision to continue the pause in rate hikes that began it agreed a couple of weeks ago, since the rise is due to the rise in the oil price which is due to quota changes more than increased consumption and will therefore peter out quite soon.

Second quarter growth is predicted to reach 2.1%, by far the best result seen in the G7. The pause in rate hikes has meant that rates are still in neutral territory which is expected to lead to a similar level of growth in Q3.

While rates have risen to the highest in a generation, there is still confidence being shown in the Federal Reserve since the majority of the public see inflation as being a consequence of the support that was provided by the Federal Government during the Pandemic.

Any decision on a continuation of the pause at the next FOMC meeting which is due to take place on 31st October will be heavily influenced by the September employment report which is due to be published in a week’s time and the figures for inflation that follow the following week.

The President of the Richmond Fed, Thomas Barkin spoke yesterday of his view that there should be no barrier to further rate increases should core inflation remain persistently high.

The first estimates for the employment report show that the market’s expectations have tempered somewhat with fewer than 159k new jobs having been created and the unemployment rate likely to have risen again.

Yesterday’s release of weekly jobless claims showed that the average is still well above the 200k level which is a watershed where more jobs are being lost than created.

The dollar index took a breather yesterday from its steady increase that had lasted almost two weeks.

It fell to a low of 106.02 and closed at 106.13, erasing its gains from the previous day.

EUR – Market Commentary

ECB doing all it can to tighten policy

Eurozone wide inflation data will be released later this morning and is expected to show that prices have increased by 4.8% year-on-year in September, down from 5.3% in August.

While this is an improvement and shows that the cycle of interest rates that the ECB began more than a year ago is having some effect.

However, it will do nothing to discourage the hawks on the Central Bank’s Governing Council from pushing for another rate hike at the next meeting.

The consensus feeling was that the ECB would be close to ending the cycle, by now, and although some of the dovish members of the Governing Council have been making noises to that effect, the “stickiness” of inflation is unlikely to see a pause just yet.

With rates likely to continue to increase well into the fourth quarter, the economic predicament that Germany finds itself in is likely to last well into the New Year.

Germany appears to be sacrificing itself on the altar of its national fear of inflation as it is the one member state of the Eurozone that needs a pause in hikes more than any other.

Data published this week and leapt upon by the right-wing press in the UK shows that the hole that the German economy is in is far deeper than had previously been imagined.

The energy crisis has lingered and is still hampering German industry while disruption to supply chains have meant that exports have continued to suffer.

The services sector that “flies under the radar” given the traditional strength of German industrial output is also suffering as financial services firms withdraw behind national borders.

Already in recession, the German economy cannot be expected to provide the power that is usually associated with it to drive the Eurozone away from a potentially widespread slowdown.

With the economy faltering and interest rates still on the rise a bout of stagflation cannot be ruled out. The exact opposite of the soft landing that is being considered in the U.S., stagflation is rare because inflation and falling output are rarely seen in the same economy at the same time.

The Euro gained a little respite yesterday as the dollar took a breather. It erased its losses from the previous day but still looks vulnerable.

It climbed to a high of 1.0578 and closed at 1.0568.

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.