6 September 2023: Still no room for freebies


  • Hunt will present Autumn statement on 22nd November
  • Recession odds at 15% as confidence grows
  • At the factory gate prices fall for seventh consecutive month
GBP – Market Commentary

Giveaways were unlikely before, but the RAAC crisis has made them impossible

The Treasury confirmed yesterday that Chancellor of the Exchequer, Jeremy Hunt, will announce his Budget for the coming year on 22nd November. In the past, the country could have expected an expansive set of proposals including tax cuts, given that it will be the last Budget before next year’s General Election.

Although he received better news about how well the country had recovered from the Pandemic, it was announced by the Office for Budget Responsibility that there will be little room for tax cuts since the total cost of the RAAC issue will take precedence.

Hunt entered the conversation over the Government’s “green policies” commenting that he will ensure that when adopting changes to comply with sustainability targets cost will be an important criterion.

The Government has received an unexpected bonus from the revision of the country’s improved fiscal position. The Opposition has come under fire for its negativity over Rishi Sunak’s performance as Prime Minister and there have been calls for Labour Leader, Sir Keir Starmer to “dial back” his negative rhetoric.

The significant rise in the cost of a barrel of oil will have a significant effect on the headline inflation data when the August numbers are released next week.

Although the core rate is expected to continue to fall, there is likely to be no encouragement of the Bank of England to pause its cycle of rate hikes in the more volatile headline numbers.

The cost of a barrel of Brent Crude touched almost $91 yesterday as OPEC remained stoic in its refueling to increase supply. Although the global economy is yet to perform at pre-Pandemic levels, Russia has announced a cut of 300,000bpd in its own production.

While the end to the almost twenty-month cycle of interest rate hike is coming to an end as rates start to become restrictive upon demand, there have been several warnings recently that the Bank of England is unlikely to be able to lower rates until at least the second quarter of next year for fear that it will reignite price rises.

Rate cuts will only be considered sooner than that if the economy looks like heading into recession, which currently looks unlikely.

The pound challenged the bottom of its recent range yesterday, falling to a low of 1.2528. It eventually closed at 1.2564, but still looks to have further room to fall with the next support at around the mid-1.24’s.

USD – Market Commentary

Powell set to beat a fifty-year-old truism

The market is beginning to feel the confidence that is beginning to creep into the belief that the U.S. economy can look forward to a soft landing as the monetary policy decisions of the Federal Reserve look less and less likely to drive it into a recession.

Investment Bank, Goldman Sachs, in its latest note to investors put the odds of a recession in the next year at just 15%.

If the economy manages to continue to grow, albeit at below trend pace until the middle of next year, Jerome Powell can add another significant achievement to his CV.

He will have been the first Fed Chairman since WW2 to have defied an inverted yield curve and falling leading indicators from the Confidence Board. Powell is unlikely to champion this fact. He will believe that he has been proven to have adopted the most beneficial path to lead the country through its post-Pandemic period.

Gasoline prices hit a seasonal high as the Labor Day holiday which was held on Monday marked the end of summer. It is likely that this rise will negatively affect the headline rate of inflation but since it is expected to be a “one off” will not change the now probable pause in interest rate hikes at this month’s FOMC meeting.

The nature of the August employment report showed that the Fed’s rate decisions have brought the fed funds rate to a critical juncture where it is neither supportive nor restrictive upon demand. While 187k new jobs were created there were sufficient falls in other areas to see the unemployment rate rise.

Gone are the days when an employment rate of 5% was considered full employment with the true figure now considered closer to 3.5% due to changes in productivity.

The dollar reached its highest level in six months. Part of the rise was due to market concerns that the rising oil price may derail the economy, but it is more likely that the overall increase in confidence that is surging through the economy will see the Fed remain in a position to provide another pause.

The index reached a high of 104.90 and closed at 104.80. This was its highest close since March 15th. The next level of resistance is around 105.65 although this may be tough to breach unless the market is re-energized by a mild correction.

EUR – Market Commentary

ECB President perfects her “fence sitting” skills

The ECB President has been unusually reticent to provide her opinion on the outcome of the next meeting of the Central Bank’s rate setting Governing Council.

If she is taken at her word, she is undecided whether a further hike in short term interest rates will serve the entire Eurozone, and she senses a change in the way the “winds of change are blowing.”

It is interesting to note that Joachim Nagel the President of the Bundesbank, a man less given to strident calls for inflation to be crushed by higher rates than his predecessor, has been even more reticent than usual to discuss his views on what will happen on September 14th.

In March, he called for the ECB to be more stubborn in raising rates to combat rising inflation. Contrast that with his latest comments where he avoids the subject of rate hikes entirely and discusses alternative ways to tighten monetary policy like reducing the size of the ECB’s balance sheet which he feels has been neglected for too long.

It is a completely different approach which is driven by the parlous state of the German Economy.

While it is easy to discuss the risks of a recession while the economy is showing growth as soon as the downturn becomes reality the rhetoric must change.

Although it is unlikely that Nagel would call for moderation in rate hikes or even a pause, he can be expected to avoid the subject for the next week or so.

Christine Lagarde spoke yesterday of the limitations in its ability to forecast the future of the Eurozone economy given its number of “moving parts.” She also accepted that creating monetary policy that is “all things to all men” borders on the impossible.

Lagarde’s colleague Philip Land, the ECB’s Chief Economist welcomed the news that inflation now is on a downward path but warned that more data is needed to confirm this.

The euro suffered at the hands of a surging dollar yesterday. It fell to a low of 1.0706 and closed at 1.0722.

1.0630 and 1.0520 are crucial points if the currency is not to see a major collapse before the end of the year, but relative interest rate levels may provide some support.

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.