9 January 2023: Brexit, still a millstone for economy

9 January 2023: Brexit, still a millstone for economy


  • Government changes tack on public sector pay
  • Fed accused of damaging prospects for growth
  • Inflation eases to 9.2% on lower energy costs
GBP – Market Commentary

Self-isolation is not proving a success

The Prime Minister, appearing on weekend TV, provided what the head of the Royal College of Nursing called a chink of optimism, by confirming that the Government will meet with the representatives of nurses and ambulance crews to talk about pay.

There remains some confusion about whether Sunak was referring to the pay award for this financial year, which has already been put to, and agreed, by the independent pay and rewards body or the next financial year which begins in April.

Representatives of nurses confirmed that strike action would only be suspended if the talks include this year’s award.

The Government is clearly on the back foot as waves of industrial action sweep through the public sector, with junior doctors and teachers currently going through the balloting process.

There are no signs of a thaw in relations with railway workers, who have caused misery and havoc with their strikes, which look set to continue for several weeks and possibly months.

Sunak readily acknowledges that the NHS is close to crisis, as the winter flu season is exacerbated by a rise in cases of Covid-19.

The present Government, which is about to enter its thirteenth year in power, looks like it is rapidly running out of steam as it deals with three significant policy errors that have blighted the economy.

First austerity which saw public services cut to the bone, as David Cameron and his Chancellor George Osborne tried to rebalance years of socialist rule but as history has shown went way too far.

Cameron was then bullied into a referendum on EU membership, which was both ill-advised and didn’t have a strong enough team representing the interests of those who wished to remain. Boris Johnson’s jingoistic rabble-rousing while leading the Brexiteers had a relatively simple job in persuading votes.

In spite of this, the result sent shockwaves throughout Europe as well as at home.

Finally, last year’s fiasco, which saw Johnson unseated and replaced by the ludicrous and humiliating, albeit brief, Truss/Kwarteng alliance which brought the country to the brink of financial disaster, has seen Sunak take the reins.

He has barely had a chance yet to mark the role of Prime Minister with his own stamp and will now be plunged into a long-drawn-out election campaign against an opponent who has very little by way of policies that will significantly improve the economy but which, the electorate believes, deserves a chance to revitalize the management of the country.

As the financial markets start their first full week following the festive break, Sterling is still dealing with the issues that plagued it in 2022. Inflation is continuing to rise. Last week saw food inflation reach a record high, while the Bank of England risks making any recession a lot worse by continuing to tighten monetary policy.

At least fuel and energy prices have moderated somewhat, which should bring households a little relief.

Last week, Sterling was slow to get off the starting blocks. It was barely changed on the week, closing marginally higher at 1.2096.

USD – Market Commentary

Non-farm payrolls top expectations

The markets will have to remain in their current state of flux, awaiting a sign that the U.S. economy is about to begin what may feel will be a slide into a shallow recession in 2023.

The December employment report was released on Friday and, in keeping with private sector employment and data for lay-offs which are also released in the first week of the month, continued to show a degree of strength that should be now be wavering as the Federal Reserve has now seen its tightening of monetary policy enter the stage where higher interest rates are restricting the economy.

Headline non-farm payrolls data confounded analysts as the economy added 223k new jobs in December. The November headline was revised slightly lower, but overall, it was a significantly stronger report than it should have been for this stage of the cycle.

The unemployment rate fell from 3.6% to 3.5% while both underemployment and labour force participation continue to move in a positive direction.

There is certain to be no change to the actions of the Central Bank based upon this report and a fifty-basis point hike is now almost locked in for the February 1st FOMC meeting.

As things stand, even inflation data is beginning to respond to Fed policy and monetary policy is likely to be the only game in town, until the FOMC either reduces the increments by which it is currently hiking interest rates or Jerome Powell provides the markets with advance guidance as to the Fed’s intentions.

For now, Powell has the market just where he wants it; continuing to be data driven but with enough leeway to spring a surprise if he feels it is warranted.

Should the employment picture change radically, the current slow drift towards lower new job creation is leading the economy towards a soft-landing, the Fed is now well-placed to act.

The dollar index was in a consolidator phase last week, and even the moderate surprise provided by the employment report did not cause a significant reaction.

It continued to build a base from which it can recover ground lost over the last six weeks of 2022 but for now traders are content to sit on their hands.

It rose to a high of 105.62, but fell back to close only slightly higher at 103.89.

EUR – Market Commentary

Italian concerns over rates are now unfounded

The New Year has brought a degree of optimism to which as surprising as it is unwarranted. Clearly shocked by the vehemence of the Italian reaction to the tightening of monetary policy by the ECB, the European Commission has been extolling the virtues of currency union and the benefits it has brought and continues to bring to members of the ECB.

Ursula von der Leyen clearly has extremely imaginative speechwriters, since it is only her relative absence from the front line that has enabled her Presidency of the Union to be labelled as anything short of disastrous.

Angela Merkel has now departed from the scene, but it will always taint her Chancellorship of Germany that she placed such stock in her long-time colleague and protégé that she virtually ensured her election to the post. Her feeling that the next President should be German meant that she was unable to endorse a German for the Presidency of the ECB.

This meant that Jens Weidman who many considered a shoo-in lost her patronage for the role and with that his chances of fulfilling the role that seemed to be his destiny.

The current Chancellor, Bundesbank Head and ECB president are competent, although Christine Lagarde has treated her Presidency of the Central Bank as something of a stepping stone to higher office in her native France.

If Weidman had replaced Mario Draghi at the ECB, there would have been both a degree of continuity, rather than the change of direction that Lagarde has fostered, together with a policy of control over inflation that would be clear and understandable.

It is almost unimaginable that, after close to twenty-five years of monetary union, that a German hasn’t held the top job at the Central Bank. A series of compromise candidates have not driven the ECB to the position of power within the G7 that its size should allow.

With inflation beginning to fall, despite the ECB not having pushed short-term interest rates into restrictive territory is a positive development, but the Bank of Italy and the Italian Cabinet are set for more disappointment at the next ECB meeting as rates are set to continue to rise.

Headline inflation fell to 9.2% from 10.1% in December as energy prices fell back to the level they were at before the beginning of the war in Ukraine.

The single currency fell back a little but recovered its poise following the release of inflation data for France and Germany as well as the harmonized numbers for the entire Union.

It fell to a low of 1.0484, but recovered to close at 1.0646.

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.