3 May 2024: Sunaks “comeback” collides with reality

3 May 2024: Sunaks “comeback” collides with reality


  • The OECD predicts that the UK will remain the worst performer in 2025
  • Biden flexes his “international” muscles
  • The mystery of the recovery continues as Manufacturing hits a four-month low
GBP – Market Commentary

The OECD claim is a blow to the PM’s hopes

The OECD believes that the UK economy will be the slowest growing economy in the G7 over the rest of this year and the whole of 2025.

This is a damning verdict on the Prime Minister’s claim that the economy has turned around since the start of the year and is primed to begin to exhibit far better growth numbers.

The economy has been in the “slow lane” for some time, is still in the “slow lane” and will remain in the “slow lane” for the foreseeable future according to one financial journalist in the City.

The economy will continue to suffer from high-interest rates and naggingly high inflation.

The OECD estimates that the economy will grow at 0.4% this year, down from the 0.7% when it published its findings last November.

IN 2025, the think tank believes that the economy will see growth of 1% as it falls to last place in the growth league table as Germany produces a GDP of 1.1%.

One reason the UK is experiencing inflation above that of its G7 partners is still Brexit, which has led to higher import costs and labour shortages.

The Labour Party, which cannot romp home in the General Election, which is scheduled to take place later this year, believes that Jeremy Hunt is unable to “fix” the economy because he is the reason that it is broken.

The Chief Economist at the OECD, Claire Lombardelli, is set to become a Deputy Governor at the Bank of England next month. Given the comments in her final report for the group, she is likely to be a dove, voting for an immediate cut in rates and having some “interesting” conversations.

This will contrast with her colleagues who make up the rest of the permanent members concerned about the disinflation rate.

The public was voting in several areas of the country yesterday in various mayoral and council elections, as well as deciding on Police Commissioners.

While it is too early to see the results of the Mayoral elections in the three major metropolitan boroughs of London, Manchester and the Tees Valley, the results that have been declared have seen the Labour Party having the most successes, but not to the degree that had been imagined. There is still a long way to go, and it remains an uncomfortable night for the Conservative Party, summed up by the fact that former Prime Minister, Boris Johnson, was turned away from a polling station because he wasn’t carrying a photo ID.

The pound has had a reactive week, as most of the “action” took place on the side of the Atlantic. Yesterday it rallied to a high of 1.2564, having earlier fallen to a low of 1.2471. It closed at 1.2534.

USD – Market Commentary

The timing of the rate cut is becoming immaterial, for now

In the current environment, the FOMC is in danger of becoming irrelevant. It is becoming ever more evident that if the Central cannot hike rates at all this year, it would be satisfied.

Powell and his colleagues who make up the rate-setting committee have gradually delayed the predicted rate cuts due to the “sticky” state of headline inflation and the pace of growth within the economy.

Any pretence at proactivity has been shelved, as they have similar concerns as the ECB to a flare-up in inflation should they cut in June or even September.

Popular wisdom now sees the first rate cut happening in November, leaving room for just two cuts this year.

There is plenty that can happen over the second half of the year, with at least two geopolitical events still possibly developing into more serious conflicts than are being seen at present.

The U.S. is pushing hard to achieve a cease-fire in Gaza between Israel and Hamas, while President Biden is keen to provide all the support he can to Ukraine in its fight to repel the invasion by Russia.

The data published so far this week has shown that the employment market remains buoyant, but the “acid test” will take place when the April Employment report is published. Expectations for the number of jobs created last month are still strong for this stage in the economic cycle.

The market still sees around 250k new jobs having been created. That will see the FOMC continue its hawkish bias.

Austen Goolsbee, the President of the Chicago Fed, will be the first member of the FOMC to comment following the release of the data. This has almost become a tradition in recent months since he often uses similar phrases to the Fed Chairman.

The release of weekly jobless claims data yesterday continued to show a level of consistency that is rarely seen since this is often a forerunner of developments in the sector.

The course of the dollar index has remained constant over this week, as traders await the full picture of employment and monetary policy.

Yesterday, the Greenback lost more ground falling to test support at 105.25, its losses were limited to 105.29, and it recovered marginally to close at 105.38.

EUR – Market Commentary

Disinflation is still happening, but slowly

The prospect of a June rate cut is still in the balance.

There are two reasons for this. The first is that members of the Governing Council have been unusually reticent to make their voting intentions known, while the headline rate of inflation remains sticky.

Preliminary data released earlier this week showed that the average rate of inflation for the entire Eurozone was 2.7% down from 2.9% a month earlier.

The ECB is no longer pretending that the economy can achieve a soft landing since they have forfeited that possibility by delaying the first cut in rates.

It is by no means certain that the first cut will take place in June, although there is considered a better-than-even chance that it will still happen.

If a cut does take place next month, the ECB will be taking a significant risk, given that the first cut in the U.S. has been delayed again. It will become even more expensive to hold onto long euro positions, while monetary policy will favour the dollar.

Data published yesterday show a setback for the Italian economy, which has been one of the best performers in recent months. Both output and new orders retreated in April.

Overall, the Eurozone economy expanded in the first quarter, having been in recession during the second half of 2023.

Overall manufacturing output in the region declined in April just as it looked like the economy had begun to improve or had at least bottomed out.

Individual data results are seen as little more than contributing to the overall picture of the economy’s health, while the market is still infatuated with monetary policy.

Next week, producer price numbers are due for release. These provide a storing indicator of future inflation, while several confidence indicators are also due to be published. These are leading indicators which provide a more forward-looking impression of what is expected over the rest of this quarter.

The Euro is still in a broad 1.0740/1.0630 range, which is unlikely to be challenged until there is solid evidence of a change in monetary policy by either the FED or the ECB

Yesterday the Euro saw moderate gains, reaching a high of 1.0730, but it drifted back to close at 1.0725.

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.