2 May 2023: BoE jealously guards its Independence


  • Stubborn inflation could push rates to 5%
  • Collapse of First Republic has wider ramifications for the Economy
  • Thoughts on size of hike remain divided
GBP – Market Commentary

New member was mooted as being a Government representative

The Bank of England again finds its independence under threat as the Government apparently wanted the new member of the Monetary Policy Committee to be from the Treasury.

Governor Andrew Bailey held firm in discussions with the Prime Minister and Chancellor of the Exchequer after it was agreed that Silvana Tenreyro would leave her role in two months’ time.

It was agreed that the new member of the Committee should be Megan Greene, a candidate who is well known in the City as the Chief Global Economist of U.S. private investigations and advisory firm Kroll.

Bailey disagreed in principle with Jeremy Hunt over the appointment of Tenreyro’s replacement since he believed that it would send the wrong message to the markets. It was felt that his reporting of MPC decisions and his responsibility for testifying before the Treasury Select Committee could be second guessed by a member who has dual loyalties.

While the domestic housing market continues to falter, there was more bad news for the sector from commercial real estate which has seen a slump in activity as the economy continues to weaken.

There are increasing signs that following eleven consecutive rate hikes since December 2021, rates are now at the point where they are restricting demand.

With inflation proving to be stubborn, the headline remained above ten per cent in March, although it is expected to fall into single figures in April, the MPC may have to increase the base rate above 5% to see the effect they desire.

This week the country is preparing for the Coronation of King Charles on Saturday. It is hoped that the boost to activity will be felt way beyond the tourism sector, although there are concerns over a fall in productivity from having two Bank Holidays on consecutive Mondays.

Last week, Sterling managed to push above resistance at 1.2540 versus the dollar on the weekly chart, reaching a high of 1.2583 and closing at 1.2569. It has started the week on the back foot due to a fall in risk appetite due to further turmoil caused by the failure of a third U.S. bank.

This week will see the publication of purchasing manager’s indexes for manufacturing, services and construction. These will prove a good indication of how the economy has progressed as it enters the second quarter of the year.

USD – Market Commentary

Banking crisis by no means over

It was a weekend similar to September 2008, when the subprime mortgage crisis reached a climax, as the Fed had to convene to agree to the sale of the assets and deposits of the third bank to fail recently.

First Republic Bank had seen over one hundred billion dollars in deposits removed by clients in March and its shares tumbled on Friday.

In the fire-sale of its assets J.P. Morgan emerged as the winner, extending its status as the world’s largest bank even further.

J.P. Morgan is already the result of the takeover of several prestigious names from within the U.S. and on Saturday added the San Francisco bank to its portfolio. Having already seen names like Chemical Bank and Chase Manhattan swallowed up, the further consolidation from another regional bank being taken over by a major money-centre institution was met with mixed feelings.

Mary Daly, the President of the Federal Reserve Bank of San Francisco will face more questions about her oversight of financial institutions that fall under her purview following the collapse of Silicon Valley Bank.

The bank was known for its big home loan portfolio and providing services to a string of wealthy clients. The fallout from the two earlier collapses had shaken depositors’ confidence leading them to seek more stable homes for their funds.

The news saw the dollar index rise to a high of 102.18 on heightened risk aversion. Yesterday it continued its strength at the beginning of what could be an important week.

On Wednesday the FOMC will conclude its latest meeting with the market still unsure of the Central Bank’s continued commitment to tighter monetary policy. Even if there is a further twenty-five basis point hike in short term interest rates, all eyes will be on Jerome Powell at his news conference following the announcement.

It is expected that he may well inform the markets that he and his colleagues have decided to pause their programme of rate hikes, although he could simply hint as a pause which will leave the markets trying to decipher just how committed to the fight against inflation that are.

On Friday, the April employment report will be published. While we all know how notoriously difficult to predict the headline data is, those who like to predict it see a fall to 181k new jobs created, down from 236k in March. The risk is for an even greater fall, which would indicate that the Fed will cease to hike rates.

EUR – Market Commentary

Spain, Italy and Latvia second to Portugal in Q1 GDP

There are green shoots of recovery being seen in the Eurozone economy as first quarter GDP data for individual countries is published.

Portugal heads the league table with Q1 growth of 1.6% followed by Italy, Spain, and Latvia.

It is interesting to note that the countries seeing the most growth are used, in the past, to cope with high inflation, such as being seen currently.

Overall, the Eurozone grew by just 0.1% between January and March, missing the forecast of 0.3%. Brussels apparently sees merit in publishing the individual nation’s results as they put a more positive spin on how the economy is faring.

Germany, the traditional economic powerhouse of the region stagnated in Q1 registering zero growth. It is expected that over quarters two and three, the German economy will contract, although it is not expected to see a significant recession.

The Governing Council of the ECB meets this week and is expected to hike rates by another twenty-five basis points to 3.25%. There have been calls from the more hawkish members of the Eurozone for a fifty point hike, but the chances of that are slim to non-existent.

Last week, the single currency tried to consolidate its foothold above the 1.10 level versus the dollar. The return of risk aversion following another bank failure in the U.S. brought with it a threat, and perfectly illustrated how joined-up the global financial community has become.

While there is no current threat to other European financial institutions following the forced sale of Credit Suisse to UBS there is always an underlying fear of contagion lurking below the surface.

Along with the ECB meeting this week, German retail sales data will be released. While showing continued weakness there is expected to be some improvement from -7.1% to -6.1%.

The relative weakness of the German economy is being ignored while the Bundesbank remains committed to tighter monetary policy, although there is little hope of a sustained overall improvement for the Eurozone without a significant contribution for its largest economy.

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.