- Bank names Bernanke to defuse criticism over its forecasting
- A soft landing? Prove it!
- Fears are growing that the Eurozone faces another, longer recession
At last, some relief for borrowers as floating rates are favoured
The pressure on the Monetary Policy Committee is expected over the next year as inflation begins to fall, but in the short term, it is expected that there will be another seventy-five basis points of hikes before a pause is announced.
During the prolonged period over which the Bank of England has continued its cycle of rate hikes, its Governor, Andrew Bailey, has faced criticism for ignoring the signs, which, with hindsight, has proven to be fairly obvious that inflation was rising, close to out of control.
The belief is that if the Central Bank had been more aggressive in its hikes at the start of the cycle, that may not have had to be still hiking now.
To defuse that criticism, it has decided to commission a review of its economic forecasting. The man chosen to lead that review is Ben Bernanke, a former Chair of the Federal Reserve.
Bernanke is considered a pre-eminent economist. He led the Fed through the financial crisis before his term ended in 2014. The review is intended to allow the forecasting process to be viewed from the outside at a time when the global economy is still volatile.
The market welcomed the news. Bernanke is considered to have a deep understanding of the models that the Bank uses to make its monetary policy decisions.
Comments from politicians like former Business Secretary Jacob Rees-Mogg, who said recently that the fight against inflation had been bungled had been “unhelpful”, and the appointment of Bernanke is intended to have a similar effect to when Mark Carney was given the job, with a view to providing a fresh perspective.
The MPC will meet this Thursday and is expected to hike interest rates by twenty-five basis points. There is still a chance that it will hike by another fifty basis points, but that is not currency the most popular prediction, despite the Prime Minister’s pledge to halve the rate of inflation by the end of the year looking decidedly optimistic.
The pound settled back towards the end of last week after it reached a high of 1.3142 earlier. It fell to a low of 1.2658 and closed at 1.2855.
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Following Q2 GDP, inflation and jobs data may confirm the soft landing has been achieved
The odds against a soft-landing where inflation is brought back close to the Central Bank target of 2% by means of a tightening of monetary policy, yet the3 economy continues to grow, have shortened dramatically since the headline rate of inflation fell to 3% in June, and the FOMC saw fit to pause its cycle of rate hikes, even though it returned to it this month.
A soft landing has become something of a mythical state which no one really expected to be achieved. Now it has become analysts, and economists are scrambling to be the first to pronounce.
A little like its “distant, more negative cousin, stagflation, a soft-landing will not happen on a single day or be driven by a single event, so it will be difficult to say it has happened.
Furthermore, if it is left to the Fed to declare that a soft landing has been achieved, there are bound to be naysayers who claim that a set of conditions precedent has not been reached. With inflation expected to have fallen further in July, Q2 GDP exceeding expectations and the July headline new jobs created predicted to be significantly below 200k. Someone will need to grasp the nettle soon to make a claim that the Fed has reached its objective.
Over the rest of the year, the FOMC will hold three more meetings. It is expected that they will hike once more, in the autumn, before declaring the cycle to be at an end.
For now, this week’s release of July’s employment report is expected to confirm that the Fed’s job is nearly done.
Last week, the dollar index confirmed that it now has long-term support at around the 100-level following its recent correction. It fell to a low of 99.56 but recovered to reach 103.57 but settled back to close at 101.78.
With employment data this week and inflation next week, traders will only be able to start their annual holidays until those two important releases are out of the way.
Italians call for Lagarde’s dismissal
Nagel has taken up the reins from the President of the ECB, Christine Lagarde, who was a little more cautious in her statement following last week’s meeting of the Governing Council of the Central Bank, at which it was agreed to hike rates by a further twenty-five basis points.
Far from saying that a hike in September was a “done deal” as she has after the past two meetings, she contented herself by saying that “all things are possible.”
He continued his hawkish stance, even if it was tempered a little, upset the Italian representative enough for them to call for Lagarde to be relieved of her duties.
A senior senator from Georgia Meloni’s ruling party made a speech in which he said that Lagarde must be expelled. Maurizio Gasparri’s view doesn’t yet represent the official view of his Party, but if the pressure for a further hike in September grows, it may well become so.
Meloni was in Washington last week, where she met President Biden. She took the opportunity to decry the “false propaganda” that surrounds her appointment as Prime Minister, which paints her as being a “female Mussolini.” While her politics are right of centre, she confirmed that Italy remains a passionately committed member of the European Union, even if her Party disagrees with some of the policies that are passed in Brussels.
Meloni has shown herself to be far more prepared for compromise, particularly over immigration, than was expected when he came to power.
Following last week’s entirely predictable rate hike, ECB officials are now free to depart for their annual holidays but will need to be careful to consider the ramifications of their September meeting.
It is likely that a “line in the sand” has been drawn, with a rebellion possible if a further rate hike is agreed. Also, the economic forecasts are not very encouraging for the rest of the year, with a recession already a distinct possibility, without a further rate hike.
The Euro spiked to an unsustainable high of 1.1275 last week, but still looks fragile above the 1.10 level. It eventually settled back to close at 1.1011, although it is likely that volatility will fall away over the next few weeks.
Have a great day!
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28 Jul - 31 Jul 2023
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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.