7 June 2022: Sunak supports Johnson in public

Sunak supports Johnson in public

7th June: Highlights

  • Would removing Johnson help the economy?
  • Biden blamed for slow down by 83% of Americans
  • Bell about to ring for round one of rate hike battle

Also supports rate hikes to drive inflation lower

The Prime Minister survived a vote of no confidence last evening, as his critics were unable to garner sufficient support to oust him from office.

Boris Johnson will know that his critics have gone away, and although he cannot now be challenged again for a year, his performance will remain under intense scrutiny.

That having been said, for all his faults, Johnson is considered to be the Conservative’s trump card in elections. It would now be considered foolhardy for rebel MPs to challenge him again, unless there is another scandal of the magnitude of Partygate between now and this time next year, given the fact that the next General election will be less than 18 months away.

The Chancellor, Rishi Sunak, testified before the Treasury Select Committee yesterday. Sunak remains an important figure in any leadership debate. His popularity soared when he arranged payments to those being furloughed during the Pandemic, but he was then heavily criticized for raising taxes in his budget last November, and was considered to be slow in arranging help for the lowest paid as the cost-of-living crisis began to bite.

Having had a meteoric rise in stature within the Party, Sunak would be considered favourite were there to be a leadership ballot.

Other contenders would most likely be; Deputy Prime Minister Dominic Raab, Health Secretary Sajid Javid, and Home Secretary Priti Patel.

With little to choose between the holders of the most senior Cabinet Posts, it shows how tough it would be for this Government to be re-elected, even if this Parliament ran its full term.

There was some slightly better news for the economy yesterday. Like-for-like retail sales fell in May, but not as much as had been feared. A fall of 1.7% in April was expected to be followed by a far larger 3.5% fall. The actual result showed that the fall in May was less than April, coming in at -1.5%.

The pound has entered a fairly narrow range as analysts consider the next move from the Bank of England. The cost-of-living crisis is still a significant issue which needs to be addressed, but if the Bank is considered too hawkish, it could tip the economy into recession.

Support between 1.2480 and 1.2500 looks quite solid, but there are sales orders being placed around 100 points higher.

Yesterday, Sterling rose to a high of 1.2577 but fell back to close at 1.2532.

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However, the majority cannot put their finger on the reason

By comparison to the term in office of his predecessor, Joe Biden’s Presidency could be almost considered serene. Where Trump tackled issues head on without much reference to his advisors, Biden has been more considered, leaving the hands of the various agencies to do their jobs.

A recent survey blamed Biden for the current state of the economy, but when questioned, those surveyed cannot quite put their finger on the reason why.

First, they were led to believe that towards the end of the Trump Presidency, the economy was surging ahead. This was almost totally due to comparisons with the state of affairs created by lockdowns.

Biden is criticized from the right wing of the country for being overgenerous with handouts to those who were suffering. This was not considered to be the American Way.

Fears continue to grow that the Democrats are going to be slaughtered at the upcoming midterm elections. This has added to criticism of Biden’s inability to bring in game-changing policies, having mistakenly believed that his first two years should be used to rebuild confidence in the Office of the President.

It is fairly likely that Biden will face Trump again in 2024, and that will leave the country with a dilemma. It is likely that many swing voters will turn to Trump, while it will take a superhuman effort to convince those anti-Trumpers to remain faithful to Biden.

Last week’s employment report provided a certain amount of relief regarding the recession that is being predicted for the end of the year.

In the survey mentioned above, no major reason emerged for why there is pessimism. Rising interest rates should see inflation return to acceptable levels, while jobs appear relatively plentiful despite a supposed tightening in the labour market.

It is something of a truism that in a period of rising interest rates, no matter the cause or necessity, the Administration becomes less popular. When this feeling is added to the perceived unpopularity of the President, a downturn in consumer confidence is likely to follow.

The dollar index is well-supported at lower levels, but the market is waiting for the outcome of the next FOMC before trying to reignite the recent move higher.

Yesterday, it rose to a high of 102.46, closing at 102.39.

Once they start to shift that, rates will skyrocket

When comparing politics in the Eurozone to the common rough and tumble of the U.S. and the cloak and dagger intrigue of the UK, it is often believed that there is more finesse to the way things are done in Europe. That may be due to the lack of a common language as the EU Commission drives a post-Brix move away from English, or simply the players in the game appear more polite to each other.

That entire premise is about to be severely tested, as the European Central Bank meets this week. There will be two topics of conversation that will dominate the conversation.

The first rate hike in the new monetary policy cycle will be agreed, although there will still be dissenters who are prepared to ignore record high inflation in order for their failing economies to continue to be supported and those who see their economy as sufficiently strong to withstand a slowdown in order for their savers to receive a return on their investments.

There is little doubt now that there will be a rate hike, even the president of the ECB is on board! However, until recently it was assumed that the hike would be of twenty-five basis points, now there is a discussion to be had about a fifty-point rise.

That matter is too close to call, yet the short to medium term fate of the single currency will rest on it. Were there to be a twenty-five-point hike, there is likely to be disappointment that an opportunity has been missed, while fifty will be seen as unusually hawkish with the likelihood rising of further fifty-point hikes going forward.

One further issue facing the ECB going forward will be the reduction of the size of its balance sheet.

During this period of support for the economy, the Bank has purchased close to Eur 5.5 trillion in Government debt. Even if it is allowed to gradually mature, the ECB may be the only buyer for bonds that are issued in replacement.

While the ECB works towards the normalization of the money markets, the normalization of the sovereign bond market will prove to be a tough nut to crack.

The euro traded in a narrow range yesterday. It fell to a low of 1.0684 and closed at 1.0696.

Have a great day!
About 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.”