30 August 2023: Bailey still wants higher rates


  • Differing views of green commitment
  • Consumer confidence is beginning to wane
  • Latest data points to a Eurozone-wide recession
GBP – Market Commentary

Fears over adding to inflation delay post-Brexit checks

The UK continues to delay additional food safety checks on imports from the European Union since they fear that the additional delays created by performing the checks will create shortages and drive up inflation.

This is yet another demonstration of the lack of foresight that accompanied the UK’s departure from the EU which has piled additional red tape and additional costs onto firms still wanting to trade with the EU or operate within its boundaries,

It is estimated that Brexit has been directly responsible for around 30% of food price inflation since 2020. The necessary border checks to ensure that the origin of products have again been delayed as the Government fears such checks could choke off supplies.

The EU supplies 28% of the food consumed in Britain. It is now clear that Brexit was an ill-conceived notion that gained momentum due to over-zealous jingoism Which in the cold light of day, has set the country back at least ten years and is partly responsible for it being unable to shake off high inflation.

Several industry groups have welcomed the latest delays to the implementation of further checks since they are likely to make them less competitive and create further issues in supply chains.

Within the EU, there is a feeling that Germany’s insistence on clean energy and a range of other green policies have contributed to the country’s economic downturn since they are not yet able to seamlessly adopt some of the more radical ideas.

The opposite view of being expressed in the UK as the Prime Minister mulls over abandoning parts of his green agenda. He has been told by a number of environmental pressure groups that such actions would drive the economy further towards a recession.

The furore over the introduction of a wider ultra-low emissions zone in London is an example of Sunak’s thinking, even though action to have it scrapped failed in the courts.

Investors are beginning to get cold feet about investing in Britain’s green energy future since they do not see them being profitable for some considerable time.

There is no Tier One economic data due for release this week, so the pound is expected to be in reactive mode. Having got off to a slow start due to Monday’s holiday, it rallied yesterday in reaction to the first of the week’s U.S. jobs reports.

It climbed to a high of 1.26.54 and closed at 1.2580. Until there is some hard evidence of the Bank of England’s intentions regarding monetary policy it is unlikely that Sterling will move out of its wider 1.2750/1.2550 range.

USD – Market Commentary

Some FOMC members voted for a hike in July, what’s changed

There remains an undercurrent of concern in the heartlands of U.S. industry that the FOMC is on the verge of “killing” manufacturing even as some firms are leaving China and returning home.

The patriotic message that was promulgated by Donald Trump still chimes with several industry groups, although they still believe that it is only the cost benefits of manufacturing in China that keeps their heads above water in the face of interest rates that have been rising for eighteen months.

The concern is that following a more hawkish than expected speech from Jerome Powell at Jackson Hole last week the Fed will continue to hike rates if there is even a whiff of inflation.

Taking a wider view of the economy, there are a number of issues facing supply chains relating to both raw materials and finished goods that are contributing to inflation which cannot be controlled by tighter monetary policy.

Gina Raimondo, the U.S. Secretary of Commerce, spoke yesterday of the continued “partnership” with China, which, despite being difficult at times, is in both countries’ best interests, and it would be a mistake for either side to decouple from the other.

At the most recent meeting of the FOMC, a hike of twenty-five basis points was agreed, yet this month it is believed that the vote will be for another pause.

The Central Banks’ efforts to be proactive are being considered by its critics as being confusion, since very little has changed in the ensuing couple of months.

This week’s employment report will see the headline new jobs created figure continue to fall in line with the Fed’s hopes for a soft landing. This shows that overall Fed policy has been about right, but as rates approach restrictive levels, an unclouded vision would better suit the situation rather than months-by-month tinkering.

It does feel that Powell “can’t do right for doing wrong” and this may well be little more than a hangover from his Republican sympathies and perceived links to Trump.

Yesterday’s data for job openings was inconclusive, and the market awaits Friday’s NFP data as a further clue to the FOMC’s intentions. The latest prediction is for 170k new jobs to have been created this month. Anything above this figure will lead the market to believe that the Fed will move again in a few weeks’ time.

The dollar index saw a mild correction to its recent strength yesterday. It fell to a low of 103.36 and closed at 103.46.

EUR – Market Commentary

Some policymakers still feel it is too early to pause

Martins Kazaks, the Head of the Latvian Central Bank and, despite his country’s stature, is a prominent commentator on ECB monetary policy, spoke on the fringes of the Jackson Hole Symposium at the weekend of his view that next month may be too soon for the Central Bank to be considering a pause in rate hikes.

He feels that a pause now may lead to his colleagues on the Governing Council having to “inflict more pain” later, possibly when the economy is even less able to take it.

A pause is being contemplated now after nine consecutive hikes for little economic reason other than it is something that the doves desire.

It is true that Italy and Germany are heading for recession, but overall, the Eurozone, while not performing at anything like its recent trend, will suffer more from high inflation unless it is continually tackled.

Inflation is real and tangible, while the doves’ reasons for a pause are mostly due to expectations and possibilities.

A recession is a possibility, little more, despite last week’s poor output figures, while wage growth is only just beginning to slow. The conflict in Ukraine continues to pressure supply chains and shortages still loom in basic foodstuffs.

Interest rates are currently in a state where they are neither supporting nor restricting demand. A further hike next month could be the “straw that finally breaks the camel’s” back and sees the fall in inflation accelerate.

As the members of the Governing Council continue to drift back from their summer holidays, there will be plenty more opinions delivered thinly veiled as facts, so for now the decision to be made in four weeks’ time is still unclear.

The Euro remains supported by the possibility of a further tightening of monetary policy, and little else. Yesterday, it rose to a high of 1.0892 and closed at 1.0879.

Inflation figures for August in Germany will be published later. They are likely to show a continued moderate fall, but it is unlikely to be enough to encourage the Bundesbank to support a pause in rate hikes.

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.