6 January 2023: Government backs more support


  • Household gas prices to fall
  • Private sector jobs rise by far more than expected
  • EU Construction sector hit by rising costs
GBP – Market Commentary

Mortgage costs driving down housing market

Jeremy Hunt, the Chancellor of the Exchequer, announced the additional payments that will be available to the lowest paid and recipients of certain benefits in the new financial year, this week.

The cost-of-living element will be one thousand pounds paid in three installments spread throughout the year. The subsidy to assist with the cost of energy will also remain in place.

This has cost close to eighteen billion pounds in this financial year, but is likely to cost less in the next as although the energy cap is being raised, meaning that the average household bill will rise from the thousand five hundred pounds to three thousand pounds, the wholesale cost of gas has fallen, and it is estimated that the average bill will be two thousand eight hundred pounds.

Sir Keir Starmer, the Leader of the Opposition, set out his alternative plan for the country yesterday and while it was generally well received it fell short of announcing what the Labour Party would do to repair the economy were it to be elected in the next General Election.

Starmer tried to show that his Labour Party is electable and can provide a genuine alternative to the Conservatives, who will have been in power for fifteen years by the time of the next election. Gone are the internal squabbles of the Corbyn leadership and the dominance of the left-wing trades unions.

Starmer hopes to lead a left of centre but eminently centrist Party to power in two years.

His major issue will be how he can illustrate sufficient difference in his policies from the current Government as both try to dominate the centre ground.

The housing market, which is one of the dominant sectors of the UK economy, is continuing to suffer from the drip feed of tighter monetary policy that has seen the Bank of England hike rates at every MPC meeting for the past year.

There has been no indication from the Bank as to how much further the rate will need to rise, and this is deterring homeowners from moving and providing no encouragement to first time buyers to take the first step on the property ladder.

Inflation is continuing to be an issue, with a record rise in food price inflation having been seen this week, while price rises are beginning to top out and fall in other G7 economies

The pound fell back to the bottom end of its recent range as the dollar was boosted by private sector employment data. It reached a low of 1.1873 and closed at 1.1909.

USD – Market Commentary

Hikes may come to an end, but no cuts in sight

The slightly more hawkish tone of the minutes of the latest FOMC meeting appears to have been well justified, judging by the data for both private sector jobs created in December and a fall-back towards to 200k in the weekly jobless claims figures.

The ADP new jobs figures showed that 235k new jobs were created in December, up from 127k last month and market estimate of 150k.

The weekly jobless claims were 204k, which lowered the four-week average to 213k. The less indicative Challenger job cuts data showed a fall in December from 77k to 44k.

While none of this data is heavily correlated with the non-farm payrolls data that will be released later today, it shows a degree of overall strength in the labour market.

This has led analysts and commentators to raise their expectations for a strong headline number in the December employment report, although there is still expected to be a degree of weakness in some of the data.

While the last FOMC meeting was held too soon for a first cut of the employment report to be available, it is clear from the minutes, when compared to the minutes of the November meeting, that the jobs market was retaining a significant degree of strength.

This has caused the market to cast aside fears that the data would have turned negative by the end of this quarter and means that the FOMC will continue to tighten monetary policy at least until its March meeting.

It was also apparent from the December minutes that rates are unlikely to be cut during this year, which means that the next Presidential election may take place against a backdrop of a rising economy, something that the Republicans couldn’t have imagined possible.

The dollar index is being well-supported by the data seen this week. Yesterday, it rose to a high of 105.27 and closed at 105.13. Having closed above resistance at 105,09, the scene is set for a substantial gain should the NFP headline exceed expectations.

EUR – Market Commentary

How much of a wildcard is Meloni?

Italy has not only got the weakest economy in the Eurozone, as well-being is expected to pay the highest margin above the benchmark for its medium-term borrowings, but concerns are growing about the country becoming something of a wildcard.

Giorgia Meloni, the Right-Wing Prime Minister elected last year has, so far, proved to be less of a firebrand than had been imagined and even having the security of seasoned politicians around her has not so far driven her to make decisive decisions.

However, that may be about to change. The Italian Cabinet was up in arms recently when the ECB hiked interest rates by fifty basis points. Yesterday, Italy’s Defence Minister questioned the independence of the ECB from other national Governments. He complained that we have relinquished the ability of independent bodies to decide policies that are beneficial to citizens of Europe.

The Prime Minister also said that the ECB should stop making choices that make things worse and improve its methods of communication.

The ECB’s latest actions, in fact the entire programme of tightening monetary policy, have caused significant difficulties for Italy on international bond markets.

Meloni feels that with no end to rate hikes expected soon since ECB officials are still making hawkish comments, although inflation in the entire Eurozone is beginning to fall, Italy’s situation could worsen considerably.

While there has been absolutely no hint at Italy being forced out of the single currency, a period of disobedience towards Brussels is likely.

The European Commission has also been accused of holding talks with the previous Prime Minister and former ECB President Mario Draghi to try to engage his help in finding a solution to Italy’s debt situation.

Draghi is no longer a member of the Government, but is considered by many, outside Rome, to be the most able to suggest how Italy can remain afloat.

The euro suffered from the renewed strength of the dollar due to encouraging data from the employment market.

It fell to a low of 1.0515 and closed at 1.0520 and could remain under pressure into next week.

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.