6 March 2023: Budget for cost of living expected


  • Does Hunt really care about levelling up?
  • Retailers are anxious about their prospects for 2023
  • Core inflation a significant concern for Lagarde
GBP – Market Commentary

Time running to improve lives before election

Jeremy Hunt, the chancellor of the Exchequer and Prime Minister, Rishi Sunak are finalizing the preparations for the Budget that Hunt will present to Parliament in a couple of weeks time.

Considering that there will only be one more chance to provide the giveaway Budget, that often precedes a General Election, Hunt is unlikely to provide backbench Conservative MPs who fear for their seats in the Election with anything that lifts their confidence.

Rishi Sunak has been extremely workmanlike since he took over as Prime Minister, reaching an agreement over the treatment of Northern Ireland as part of the overall Brexit solution and will announce fresh legislation to deal with the constant flow of arrival of refugees crossing the English Channel.

However, one the the major planks of the Conservative manifesto from 2019 is the levelling up agenda. This was the idea that less emphasis would be placed on the South East of England, with investment being delivered to the North and other regions.

The centrepiece of this process was set to be HS2, the high speed rail link that is intended to cut journey times between London and the major cities of Birmingham, Manchester and Leeds.

The planned route has already been changed with a service to Leeds being scrapped, and the entire project is in danger of becoming a white elephant.

Another area where the Government is making progress is in the area of public sector pay. The planned strikes by nurses this week have been postponed pending further talks, while it was announced yesterday that ambulance crews will also abandon plans for industrial action whale talks are taking place.

While it is encouraging that the Government is finally escaping from the morass that accompanied Partygate and the highly damaging Truss Shambles, The opposition is still almost out of sight in opinion polls.

Given that the Conservatives have been in power now for thirteen years, this appears to be the optimum period for the electorate to feel that it is time for a change, as both Tony Blair/Gordon Brown and Margaret Thatcher will testify.

A week is certainly a long time in politics, and the feel good factor that accompanied January’s output figures and the fall in Government borrowing has dissipated. Jeremy Hunt is still not expected to provide any tax cuts in the budget, and any relief will come in the form of further support for those suffering the worst of the cost-of-living crisis.

The energy cap will remain for at least three more months, although the Government is confident that the wholesale price of gas will continue to fall as the necessary adjustments are made to supply in light of Russian interference.

The pound rose from its recent low last week, reaching a high of 1.2143 and closing at 1.2044. The medium term path for Sterling is dependent as much on market perception of the Bank of England’s plans for monetary policy as it is by their actual rate hikes.

USD – Market Commentary

Retail sales remain a major issue as consumers shy away

Jerome Powell, the Chairman of the Federal Reserve, remains confident that the Central Bank will be in a position to provide a soft landing for the economy in which inflation falls back close to the mandated target of 2% but doesn’t dampen demand enough to cause a recession.

There are still several naysayers in both finance and commerce who are forecasting dire consequences if the FOMC continues to hike interest rates after the end of the current quarter.

Powell has retreated into the shadows somewhat since the last fate setting meeting where the hike in rates was cut from fifty basis points to twenty-five, and the publication of the minutes which showed that several (unnamed) members voted for a fifty point hike. It is likely that Powell remained one of the more hawkish representatives.

The January employment report, which was released a couple of days after the FOMC meeting, would probably make a significant difference to its deliberations, possibly even the result of the vote. With the February report due this Friday, it is guaranteed to receive a high degree of scrutiny.

Should not only the headline remain well above the average of the past three months, but the ancillary data on average and hours worked remain high, there is a real possibility that the market will expect a return to fifty point hikes at the next FOMC.

Powell has likely found it tough to justify the lower level of hike agreed at the last meeting, and his silence on the subject has spoken volumes.

He clearly remains determined to beat inflation, although he is struggling to carry his colleagues with him on what is becoming a one-man crusade.

The output data that was released on Friday barely remained in expansive territory, falling from 50.2 to 50.1. The significance of this will not have been lost on the more dovish FOMC members. As well as the February jobs data, due on Friday, Powell will make a speech tomorrow, in which it will be a major surprise if he deviates too much from his well known hawkish stance.

The dollar index was unable to continue its recent rally through resistance at 105.20 last week, and fell back to close at 104.52. The outcome of the employment report will set the time for the period up until the next FOMC meeting, which will be held on 21st and 22nd.

EUR – Market Commentary

Lagarde backtracks about rate hike

Christine Lagarde, the President of the European Central Bank, has been expected to carry out the heavy lifting on behalf of the more hawkish members of the Eurozone as she has been expected to justify rate increases in the face of howls of anguish from Central bankers from the weaker, heavily indebted member states.

Her testimony before the European Parliament recently, in which she confirmed that rates would be raised by fifty basis points at the Central bank’s next monetary policy meeting, has now been tempered somewhat.

Late last week, she commented that a march rate hike remains very likely.

Looking purely at the composite inflation date for the entire eurozone, a further fifty point hike would certainly appear justified, but the method of calculator will need to be looked at once the fate has been brought under control. Now would not be the best time politically for it to be adjusted, since the ECB would likely draw accusations of moving the goalposts.

Lagarde went on to say that rate hike may well need to continue after the end of the current quarter since the rate of inflation remains stubbornly high.

Germany has struggled to retain its pre-eminence in matters relating to the economy, which it worked hard to re-establish following the years that monetary policy took a backseat as interest rates and inflation fell close to zero.

With Angela Merkel and Jens Weidmann departed to be replaced by Olaf Scholz and Joachim Nagel, their lack of experience and gravitas has seen the frugal five dominated by the Austrian Central Bank Governor Robert Holzmann, who carries the flag for the Hawks.

Last week, the data drew concerns that the nascent recovery in the eurozone is beginning to stall. While there were no significant falls in output and activity, neither was there any continuation of the improvements that have been seen since the turn of the year.

With rates now close to neutral, the ECB will need to give consideration to when it will begin to level off the recent rises in short term rates, despite Ms. Lagarde’s continued hawkishness.

This week, retail sales data will be released, these are expected to see a return to positivity after a fall of 2.8% in January. The final cut of q4 GDP will also be released with no change expected to the YoY growth of 1.9%.

The single currency bounced off the previous week’s low around 1.0540. It made a high of the week at 1.0691 and closed at 1.0635.

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.