3 August 2023: Will today’s rate hike be the last?

3 August 2023: Will today’s rate hike be the last?


  • Sunak switches to election mode
  • Fitch says that the “polarisation” of U.S. politics is partly to blame for its downgrade
  • Services growth leads to 0.6% Q2 GDP upswing
GBP – Market Commentary

Monetary Policy summary will provide a view on the near-term

Since he came to power, it has been an obvious policy of Prime Minister Rishi Sunak to be seen to be “getting on with the job.” Naturally far less flamboyant than his predecessor, Boris Johnson, Sunak has not made many significant policy speeches, but that is beginning to change.

His only major success has been the delivery of the Windsor Framework, which allowed Brexit to be completed. This was achieved without the bluster and threats that had accompanied the end of the UK’s relationship with the European Union, and that has become the “Sunak way.”

However, over the past few weeks, the beast appears to have “awoken from his slumber”, seemingly realizing that he won’t stand a chance of winning the election by trying to appease every voter, so he has decided to try to win back voters who have voted Conservative, possibly for the first time, in 2019.

He, first, risked aggravating the environmental lobby by granting licenses to drill for oil and gas in the North Sea and, just yesterday, deciding to stop treating the NHS as a “Sacred Cow” and expecting it to take the blame for lengthening waiting lists, which are due to “internal protocols” and poor management.

He hopes that this new “can’t please all the people all the time attitude” will galvanize backbenchers into rallying around, particularly those who are still smarting from the way the Party and Parliament treated Johnson.

This will not be the first time that a Prime Minister has returned to the traditional values of their Party to win an election, and Sunak will be hoping this is more than a final throw of the dice.

The Monetary Policy Committee is certain to hike rates for the fourteenth meeting in succession.

They will welcome Megan Greene to the table, although independent members are still seen as little more than “window dressing” since the employees of the Bank of England continue to indulge in “group think.” Greene’s role will be to speak publicly about her views on MPC decisions and either concur or disagree with her new colleagues, in the knowledge that she is powerless to alter them materially.

In both the U.S. and the Eurozone there is pressure, both internal and external, for rate hikes to end. The MPC, still facing the highest rate of inflation in the G7, may be “forced” to continue to hike until the New Year, although that will carry the clear risk of tipping the economy into a recession.

Yesterday, the pound lost ground for the third session in a row. It fell to a low of 1.2680 and closed at 1.2711. The long-term level of support is at 1.2610, which, while not currently threatened, would see the pound tumble if it is breached.

USD – Market Commentary

The perceived soft landing may not signal the end

The “Capitol Riots” in which supporters of Donald Trump stormed the seat of the U.S. government were the subject of two major stories which broke yesterday.

First, Trump has been indicted for conspiracy to defraud the US, conspiracy to obstruct an official proceeding, obstruction of an official proceeding, and conspiracy against the rights of citizens, a charge which could see him imprisoned.

Later in the day, the ratings agency Fitch downgraded America due to the “polarization of its politics” and was called “bizarre and inept” by former U.S. Treasury Secretary Larry Summers.

Stocks fell, and bond yields rose, but the news had a negligible effect on the value of the dollar.

Trump’s formal accusation has been derided by his supporters who claim, rightly, that every time the state tries to tie him down and stop him from running for the Presidency, he makes further gains in the polls.

Trump himself labelled the charges as baseless and likened his treatment to Germany in the 1930s.

The power over the market that is held by tech giants Apple and Amazon has grown to such an extent that they are able to either consolidate the recovery and further growth of the economy or see it fall into recession.

Each will release their latest earnings figures after the markets close in the U.S. later today. More than three-quarters of firms that have reported so far have seen their earrings surpass analysts’ expectations.

The markets consider that the “endgame” as far as the economy is concerned will be the achievement of a soft landing, but the story will not end there.

Inflation will still need to be managed, and the Fed may find itself needing to support the employment market, particularly those cyclical employers whose output and investment may be severely affected by the cycle of rate hikes, even as they are beginning to peter out.

The Fed will face different challenges in 2024, and they may still include staving off a recession by beginning to cut rates, Jerome Powell has only really considered this year when talking about economic developments, and if he were asked, he would still most likely say that the FOMC is still in inflation-fighting mode.

The dollar index continues to recover from its severe correction, which ended recently. Yesterday the index rose to a high of 102.78 and closed at 102.63. It has now risen on ten of the past fourteen sessions since making a low of 99.57.

EUR – Market Commentary

Prices falling but not as quickly as expected

It is becoming a “story for the ages” to say that although inflation is falling, it is not falling at a fast enough rate to satisfy the most hawkish members of ECBs rate-setting Governing Council.

The more dovish Eurozone Central Banks, like Italy, Spain and Portugal, are unable to understand why the Germans, Austrians and Belgians continue to threaten their own economic growth by insisting that inflation has a deadline by which it must be at, or close to the ECB target of 2%.

This argument has gone on for several months and has been joined by ECB President Christine Lagarde, who following two of the past three meetings, has indicated that rates would again be hiked at the next.

Her critics insist that she is overstepping her mandate by usurping the vote, while one Italian Senator has called for her to be removed from office.

After the latest meeting, which was held last week, Lagarde tempered her prediction, simply saying that anything could happen in September.

The entire rate hike argument continues to shine a light on the performance and effectiveness of the European Parliament, which is elected to protect the interests of the people of the Eurozone.

If the Central Bank was acting in such a way in either the U.S. or the UK, there would be questions asked in Congress or Parliament, but the ECB is totally unfettered in its decision-making process.

The entire parliamentary process within the European Union is an expensive “animal”, and it is hard to understand why questions are not being asked as to its benefit.

Lagarde makes two visits a year to appraise MEPs about the actions of the ECB, but the questions that she gets about policy are tame and asked in fear of upsetting her.

Looking at the latest data, another rate hike cannot be ruled out after the ECB pauses for its summer recess. The flash estimate shows that headline inflation fell to 5.3% while the core remains unmoved at 5.5%.

Lagarde has blamed corporate profits for the core remaining static but has done nothing but note its presence.

The service sector, which is to blame for excess profits, is also creating the output which is currently keeping the region’s head above water.

The Euro has once again fallen below the pivotal 1.10 level, and the interest to take it back above it is seriously waning. Yesterday, it fell to a low of 1.0918 and closed at 1.0938.

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.