2 July 2024: Will the Bank of England celebrate an anniversary?

2 July 2024: Will the Bank of England celebrate an anniversary?


  • Voters are voicing concern about Labour’s economic policies
  • Manufacturers are mired in a slump, but does it matter?
  • Manufacturing activity continues to deteriorate
GBP – Market Commentary

Rates have been at 5.25% for ten months

The Bank of England’s base interest rate has remained at 5.25% for ten months. In most circumstances, this should be sufficient to have brought inflation under control and would have been at any time during the past fifty years. Still, as the economy evolves there are different drivers, particularly globalisation which has had a “butterfly effect”.

G7 nations each saw inflation soar as they each pumped substantial amounts of fiscal support into their economies to counter the negative effect of the Pandemic.

Economists have tried to contrast the UK, U.S. and Eurozone economy’s performance during the past three years and the conclusion is that it is more complicated than the timing of changes to monetary policy, which is the only tool that central banks possess to exert control over their economies.

The Bank of England was the first G7 Central Bank to begin to raise interest rates, but during the period between August 2022 and August 2023, the size of each rate hike remained consistent at twenty-five basis points while both the Federal Reserve and ECB used larger increments.

Was this the reason inflation remained higher in the UK than in the rest of the G7?

The electorate is being told that the economy will play a significant role in the election, which takes place in two days. One of Rishi Sunak’s central messages has been that the economy has “turned a corner” since the start of the year and the “plan” that he and Jeremy Hunt have put in place is working.

The UK looks set for its first Labour government in 14 years. The economy is a big reason ahead of the July 4 vote, but there are questions about how much the two parties differ on economic policy. Labour has used change as its central theme, but will it be enough for a different Party to be in control after Thursday?

UK Politics has not swung to the right as it has recently in France, nor has it seen the left rise as it has in Greece. It became clear under Tony Blair’s Government that the radical left had become unelectable, while Conservative “values” have been gradually eroded over fourteen years of austerity and an increasing tax burden.

Very little will change after Thursday, no matter which of the main Parties gains a majority. There is still the possibility of a “supermajority” which would change the face of the political map forever, or at least the next ten years.

Fiscal and Monetary Policy work best when they work together. However, given the mess that the Eurozone economy is in, that may not be true in every case when the ECB has sole control of the economy.

Both the Fed and the Bank of England jealously guard their independence, but they both need to understand that they need to work “hand-in-glove” with the Government to ensure growth, stability and rising employment.

Sterling spiked to a high of 1.2712 yesterday, but the rally was short-lived, and it fell back to close just two pips higher at 1.2652.

USD – Market Commentary

Will the minutes reflect two cuts this year?

The U.S. will celebrate two-hundred and forty-eight years of independence this Thursday. On either side of the holiday, Fed Chairman, Jerome Powell, will make speeches. The first will be to deliver the minutes of the latest meeting of the FOMC, while on Friday he will be competing with the publication of the latest employment report.

The market is making a serious error of judgment in believing that the Fed has become somewhat irrelevant, given the fact that interest rates have remained unchanged for such a significant period.

However, Powell’s “plan” has always been for the economy to be allowed time to adjust organically to the elevated level of interest rates to absorb the amount of fiscal stimulus that has been provided by the Biden Administration.

Several Fed officials have been “detailed” to guide the market, taking on at first a dovish persona, encouraging traders and investors to believe that there would be a series of rate cuts this year beginning as early as the end of the first quarter. As inflation became “sticky” that guidance grew gradually more hawkish with the number of cuts expected being eroded.

Now, with the economy having “caught up” Powell can provide the market with further guidance which is expected to happen on Friday. Although there has been no advance comment made about the content of the subject of Friday’s speech, the market is “gearing up” to be told what to expect from the second half of the year.

The jury is still out on the size of the benefit to the U.S. economy from the advances made in AI.

So far, the “moral” argument is still strong, and advances are being held back, particularly in the field of medicine, until safeguards are in place.

China has no such moral dilemma and its development of AI since the beginning of last year has been revolutionary in all major fields of manufacturing and service sectors, although it is still some way from full integration.

It is estimated that Chinese investment in AI will close to double that of the U.S. by the end of the decade, reaching eight trillion dollars, and despite its concerns, Washington will have to fight to catch up to ensure that, for example, Huawei doesn’t completely swamp Apple.

The election took an unexpected turn yesterday with the Supreme Court confirming that Donald Trump has immunity against some of the charges that he was facing over the events of January 6th, 2021.

His way has now been partially cleared to face Joe Biden in the election this November.

The dollar index saw a rise in volatility yesterday, trading between 105.98 and 105.42. It eventually closed at 105.81 staying above its short-term average.

EUR – Market Commentary

The Rise of the Right in France is making markets nervous

The advent of the Eurozone a quarter of a century ago had several goals. It is not clear what the overall political aim was, but it has evolved into a Union that appears committed to Centrist, middle-of-the-road ideals.

Emmanuel Macron has always been considered a European first and a Frenchman second, and that is one of the reasons for his immense unpopularity.

In recent years, Greece lurched strongly towards the left and was quickly restrained by the EU, guided by Germany, as its budget deficit grew out of control. Victor Orban in Hungary has taken the opposite view, but he is not yet considered a threat to Brussels. In the Netherlands, there has been an unusual amount of support for the radical right-wing views of Geert Wilders.

Now, after Giorgia Meloni has been Prime Minister of Italy for close to two years while the country has avoided any form of catastrophe, Marine Le Pen’s National Rally is on the verge of gaining power in France.

National Rally’s victory in the first round of voting appears to have been a galvanizing agent in forcing the Centrists of Renaissance and the left of the New Popular Front Alliance to bury their differences to fight a common foe.

It may well be that Le Pen and her associate, Jordan Bardella, are already too far ahead to be pulled back by the action of the two parties who came second and third on Sunday, presenting a united front to fight National Rally.

The ECB is holding its annual retreat in Sintra, Portugal, and it is facing potential disruption of its financial markets due to the rise of the right in France.

It seems that European bond traders are “keeping their powder dry” in case of a victory for National Rally in Sunday’s second ballot.

The economic policies of Le Pen and Bardella will see France’s debt-to-GDP ratio and Budget deficit balloon, which will see its borrowing cost spiral and the market possibly become disorderly, which will necessitate ECB intervention.

This is not the primary view of Christine Lagarde, Isabel Schnabel or Philip Lane currently, but obviously, they will have an open line between Sintra and Frankfurt, to be able to act quickly.

The euro has so far not been particularly affected by the political turmoil in France. Yesterday it rallied to a high of 1.0776 but ran out of steam and fell back to close at 1.0740.

Traders have far more interest in the timing of the next rate cut and have shown faith in the ability of the ECB to deal with disorderly 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.