8 March 2023: Mann sees pound as vulnerable


  • House prices rose in February
  • Powell sees faster rises and ultimately higher rates
  • Arch hawk will vote for a 50 bp rise in rates in this month’s meeting
GBP – Market Commentary

Other G7 Central Banks may be more hawkish than BoE

In past periods of high inflation, the Bank of England has not had to sustain interest rate hikes for any length of time in order to bring it under control because the UK has a history of having relatively high interest rates, which meant that the point at which rates became restrictive is reached relatively quickly.

That has not been the case during the latest rise in inflation, since rates had been allowed to fall close to zero as price rises had become benign as the developed nations of the world recovered from several crises.

However, during and just following the Pandemic, there was a huge increase in fiscal support which saw the public encouraged to spend. A classic example of this was then Chancellor Rishi Sunak eat out to help out scheme.

Because rates had been cut to almost zero. It has taken a significant length of time for them to begin to restrict demand. In fact, even after hiking at every meeting for fifteen months, short-term rates are only now reaching a neutral point.

This means that small and medium size businesses are facing rising costs due to as yet untamed inflation, as well as paying increased rates on their overdrafts and other working capital facilities.

The Bank of England has faced criticism for making a series of dovish hikes, in which the Governor has been almost apologetic as the MPC pushes the economy to the brink of recession.

That is one reason why the economy appears to be in such a state of flux, with data confusing the markets. The Bank of England has at least fifty basis points of rate hikes to pass before rates are truly restrictive, so the current situation is set to continue beyond the end of the first quarter.

Catherine Mann, by far the most hawkish member of the Monetary Policy Committee, spoke yesterday of her concerns for the vulnerability of the currency if the Central Bank draws its policy of rate hikes to a close before either the ECB or Federal Reserve.

The prospect of rising interest rates has provided a degree of support to the pound while, across the board, monetary policy has been a significant driver for the currency market. With Jerome Powell making hawkish noises in his testimony yesterday and Christine Lagarde having already confirmed a fifty point hike at the next ECB meeting, Andrew Bailey finds himself out on a limb, since he clearly wants to end the Bank’s policy of further hikes.

Yesterday, Sterling fell to a low of 1.1821 as the prospects of the Bank of England keeping pace with the Federal Reserve faded as the Federal Reserve Chairman left congress in no doubt of his hawkish intentions.

Having conclusively broken through support at 1.1925 Sterling may see a period of further weakness.

USD – Market Commentary

Asset markets unimpressed by Powell testimony

Having kept his powder dry since the last FOMC meeting and made no comment about the publication of the minutes of that meeting, Jerome Powell came roaring back in his testimony to congress regarding the path of short-term interest rates and the state of the economy.

He signalled that he expects the rate to rise further in the coming months, given the overall strength of the date that has been released since the turn of the year.

While he didn’t mention employment specifically, he is clearly bracing himself for another strong employment report when the NFP is published on Friday.

The tone of his remarks will have led many to believe that he feels that the decision to cut the size of the increase agreed at the last FOMC meeting to twenty-five basis points from fifty that have been seen most recently was an error.

In his remarks yesterday, he showed no fear in returning to fifty point hikes or possibly another jumbo seventy-five point hike should the situation demand.

Investors are now contemplating the eventual top for interest rates to be 6% when as recently as three months ago, the expected top was 4%.

Two major hedge funds are already contemplating the fallout from an increase to 6%. Both Black Rock and Schroders both released research yesterday in which they feel that if 6% is reached, the Fed will face pressure to cut rates in the second half of the year which will have a significant effect on bond, equities and the currency.

While Powell commented that rates are likely to peak at a higher level than previously expected, he avoided commenting on how long they will stay elevated, something that he has mentioned before.

The dollar index rallied strongly, breaking resistance at 105.30. It reached a high of 105.65 and closed at 105.62.

EUR – Market Commentary

Core inflation will remain sticky

Although Christine Lagarde has pulled back a little from confirming that the Governing Council of the ECB would agree a hike of fifty basis points at its next meeting, she received support for that stance from the self-appointed leader of the frugal five yesterday.

The Governor of the Bank of Austria, Robert Holzmann spoke of his determination to vote for a fifty basis point hike, with the likelihood of further hike to follow. This is despite the announcement from the European Commission yesterday that they have lowered their expectations for inflation in the medium term, although it still believes that further rate increases will be necessary in order to begin a period of cooling down which hasn’t begun yet.

The ECB faces the same difficulty as the Bank of England, in that it had a low starting point for rate rises, so they have taken longer to take effect. This issue is coupled with the fact that the ECB found it necessary to provide support to the weaker economies in the Eurozone for longer than was necessary.

The ECB President also spoke yesterday, likening inflation to a monster that needs to be tamed. She went on to say that it is imperative for the long-term health of the Eurozone economy that inflation returns to the 2% target as soon as possible.

Lagarde appears to have no fear of the rate increases driving the economy into an overall recession, despite the possibility of half of the region’s individual economies contracting in the first quarter.

The conflict in Ukraine is also a great unknown, with a spring offensive from Russia likely to be met with fierce resistance for the Ukrainian army.

Yesterday’s fall for the euro is unlikely to develop into a significant trend, since the ECB is expected to at least match the hawkishness of the Federal Reserve.

The single currency fell to a low of 1.0546, therefore not testing support situated around 1.0520/30. It eventually closed at 1.0559.

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.