6 November 2023: The UK is unlikely to see any growth for two years

6 November 2023: The UK is unlikely to see any growth for two years


  • BoE reports stagnating growth with lower inflation
  • Job growth slows more than expected
  • Lagarde salutes Greek resilience
GBP – Market Commentary

Bailey – a recession has become more possible

Following last week’s decision from the Monetary Policy Committee to leave interest rates on hold, the Governor of the Bank of England provided a daily downbeat assessment of the UK economy.

Andrew Bailey spoke of two years when the economy will basically stagnate, while there remains a possibility that the Bank may be forced to hike rates again as the economy suffers from an extended period of high inflation.

He went on to say that the likelihood that interest rates will have to remain higher for longer, increasing the possibility of the country falling into recession.

Overall, the base case for the Central Bank is for inflation to continue to fall sharply over the next few months, but the MPC will need to continue to be aware of the possibility for “inflationary shocks”, given the current state of the global economy.

Despite this gloomy outlook, Kemi Badenoch, the trade minister gave a surprisingly upbeat view of the country’s efforts to increase its trading position post-Brexit.

She believes that the “Brexit has harmed the country” narrative is false. While trade with EU nations increased by 13.5% in the period between 2019 and 2022, trade with non-EU nations increased by 14.3% providing a far more balanced picture of the country’s trading position.

Badenoch is responsible for several treaties being agreed and hers is one of the success stories of this Government.

She believes that the continual talking down of the country’s prospects is not based on fact and while it has taken time to get trading agreements in place, the export of goods and services to a wider group of partners will bear fruit in the medium term.

The State Opening of Parliament takes place this week when the King will deliver Rishi Sunak’s final attempts to win over voters with a progressive agenda that will announce, among other policy initiatives, the granting of several new exploration licences for the North Sea. It will be a difficult balancing act given the commitment to the net-zero target.

Last week’s decision to leave rates on hold increased the likelihood that the peak for the base rate has now been seen, despite Bailey’s warning that the Bank will remain vigilant.

Jon Cunliffe announced in August that he will step down later this year and was replaced at the MPC by Sarah Breedon on November 1st.

Breeden voted to leave rates unchanged leading to a 6-3 split.

The pound gained significant ground last week, following a weaker than expected employment report in the U.S.

It rose to a high of 1.2389 and closed at 1.2378.

USD – Market Commentary

Employment rate up to 3.9% as 150k new jobs added

It had been expected for several months, but when the Bureau of Labour Statistics finally delivered a downbeat employment report it still took the market by surprise.

The economy produced 150k new jobs in October. This was below the market’s prediction of 180k, and proved yet again that the market is nowhere near being able to accurately predict this vitally important data.

The unemployment rate rose from 3.8% to 3.9%. This will not have given a sleepless night to Jerome Powell, and the fall in average earnings will have been especially welcomed by the Fed.

The administration pointed to the fall in manufacturing payrolls which they believe were depressed by the UAW strike in Detroit, but there is no denying that the report was weaker than expected.

It is the first time that there has been unambiguous evidence of the effect that interest rate increases are having an effect and is also testament to the fact that rate increases take time to work their way through to the entire economy.

Speculation has increased that the cycle of interest rate hikes has ended despite Powell’s insistence that the Fed keeps a tightening bias.

Several economists pointed to the new job creation data and commented that it is more in line with where the economy needs to be in terms of a soft landing.

The September headline number was also revised down from 338k to 297k.

Polls published over the weekend show that Donald Trump, who despite his legal battles stays the favourite to gain the Republican nomination to battle President Biden in November’s Presidential Election, leads in several “swing states.

Michigan, which has a large Arab-American population, showed that they will not endorse Biden given his handling of the current conflict in the Middle East.

Biden’s age is also a factor, even though he is only three years older than Trump.

The dollar index fell following the publication of the employment report in h=what is likely to be seen as a knee-jerk reaction.

It fell to a low of 104.94 and closed at 105.09.

This week, the Chair of the Federal Reserve will make a speech on Wednesday in which he may provide an update on the FOMC’s intentions, but he will be sufficiently vague to keep the market on its toes.

EUR – Market Commentary

The ECB is determined that inflation will reach the 2% target

The current mood in the ECB is that there is a clear desire that the Governing Council regrets not delivering an even more hawkish set of interest rate hikes which may have seen inflation fall sooner and had a less detrimental effect on the economy.

The relative drip feed of interest rate increases had a definite effect on consumer confidence which has been falling for several months.

The decisive nature of the announcement from Christine Lagarde that the cycle of interest rate hikes had come to an end has been welcomed, but there were echoes of her earlier advance guidance of rate hikes in advance of meetings, which her colleagues didn’t appreciate, when she announced that rates will stay “higher for longer”.

In effect, her comments showed the ECB’s disregard for the economy which is now almost certain to fall into a potentially damaging recession.

Data for retail sales is due for publication on Wednesday and this will supply the first sign if the end to rate hikes has improved the mood of consumers. The fall in headline inflation may be more welcome given the continual increase in prices that have gone on for more than two years.

Positive retail sales figures from France and Spain which both saw an increase of 0.2 have been more than offset by a fall of 0.85 over the same period in Germany.

A survey published by a German retail group showed that consumers are less concerned by inflation than they were a year ago, but now the economy is causing a sense of unease.

This week will also see the release of German factory orders wish are expected to decline by around 4.5% year-on-year, as well as Eurozone-wide investor confidence which is expected to worsen to -22.5 for -21.9 last month.

Some good news is expected from producer prices which are expected to have fallen, showing a further fall in the outlook for inflation.

The euro was boosted by the markets’ reaction to the U.S. employment report. It rose to a high of 107.46 and closed at 107.31.

It remains to be seen if those gains have merely given those bearish of the common currency a better level to establish short positions.

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.