9 July 2024: How will Labour forge a new relationship with Europe?

9 July 2024: How will Labour forge a new relationship with Europe?


  • The Chancellor announces new building plans
  • Can Powell rock the markets?
  • Political uncertainty remains
GBP – Market Commentary

Starmer describes the economy as being in a “bad state”

The first week of the new Labour government started with an encouraging speech from the new Chancellor of the Exchequer, Rachel Reeves, in which she announced an end to the ban on onshore wind farms and re-introduced mandatory house-building targets.

As MPs arrived in Westminster to begin their five-year terms, the Prime Minister visited Scotland, Wales and Northern Ireland, meeting with the First Ministers of the devolved assemblies.

In a speech before setting off on his whistle-stop tour of the UK, Starmer told assembled journalists that the UK economy is in a “bad state” saying his government faces a series of tough decisions to point things right that may not “always be popular”.

Starmer himself faces a tough time switching from “campaign mode” to being the country’s leader, making daily decisions that will affect people’s lives at home and overseas.

Earlier, Reeves spoke of the need to “unblock” infrastructure development projects and encourage private investment in public projects.

In their manifesto, Labour expected 2% of those with non-dom status to leave the country. In a survey conducted by a major accountancy firm, the number is expected to be closer to 50%, costing the Treasury between four and five billion pounds in lost revenue.

This may be the first hole appearing in Labour’s spending plans, or merely a blip that is made up by increased growth and increased foreign corporate investment.

The new Government is yet to detail its plans to introduce a windfall tax on energy companies. The party has ruled out issuing new exploration licences but has been vague on whether it will permit new oil and gas projects with existing licences.

The Chief Executive of the industry body, Offshore Energies UK, said the sector and investors were deeply concerned over Labour’s plans.

“These policies, if poorly managed, and without industry input, will threaten jobs and undermine the decarbonisation of the UK economy. The details matter,”

Starmer will meet with the mayors of the large conurbations today before leaving for Washington for a NATO Summit following a significant increase in the Russian bombing of major cities in Ukraine.

His position on Gaza will also be scrutinised, as he called for an immediate cease-fire and commented that a two-state solution is his goal.

The pound retreated into its familiar range yesterday. It made a low of 1.2792 and closed at 1.2802.

USD – Market Commentary

The economy is definitely slowing down

There are growing fears that the Fed may have “over-egged the pudding” in its delay in changing monetary policy to allow inflation to fall close to its 2% target.

The Central Bank has a dual mandate to both promote maximum employment and ensure stable prices. Chairman Jerome Powell has concentrated on the latter and taken his eye off the ball concerning the former.

Regional Fed Presidents have flip-flopped from dovish to hawkish and back again, changing their position to coincide with the publication of monthly employment figures.

They have insisted that they have “time on their side” but it is beginning to feel like that time has been wasted or at least used poorly.

Powell has said several times over the first half of the year that he wants the Fed to be able to make its own decisions on monetary policy and not be forced to amend interest rates due to economic conditions.

The economy created significantly fewer jobs in the second quarter than it did in the first, and GDP is expected to have been lower between April and June than it was between January and March.

The higher-for-longer interest rate environment has sent many companies reeling, as corporate bankruptcies hit a high in June. The data came during concerns about the economy having begun to slow down.

The Fed will need to begin to monitor economic activity far more closely in the second half of the year and possibly show less concern over inflation.

Wages are still an issue, with a mild wage/price spiral having been in place since the start of the year as jobs were plentiful and workers had less incentive to show loyalty as they were able to “job-hop” with ease.

That situation is beginning to change, which may well force the Fed to reevaluate its monetary policy stance.

Powell is not a popular figure on Capitol Hill, but as the economy has been creating record numbers of jobs and inflation has fallen, he has been somewhat “fireproof”.

As the economy begins to slow, his visit to the Hill today may not be as comfortable as it was six months ago, as he presents his semi-annual testimony to Congress later this week.

Several Fed officials are making speeches over the next forty-eight hours, and the market will be studying their words closely to try to detect any change to a more dovish outlook.

The dollar is suffering from market consideration of a cut in interest rates happening earlier than has been projected.

The Index fell to a low of 104.80 yesterday but recovered to close almost unchanged at 105.03.

EUR – Market Commentary

Macron asks Attal to stay on

The second round of the French election showed that opinion polls cannot always be relied upon to predict the result of an election when the electorate is so galvanized against the policies of a Party which appears to be well ahead.

Violent clashes erupted on the streets of French cities as a left-wing coalition won the most seats in the parliamentary elections, beating Marine Le Pen’s far-right National Rally, which came third.

The uneasy affiliation of the left, which ranged from the Greens to the far-left New Popular Front, thwarted Marine Le Pen’s ambition to lead a Far-Right Party to power since the war.

Le Pen’s radical speeches in which she threatened several Islamophobic policies galvanized the electorate to reverse the result of the first ballot.

President Emmanuel has asked Prime Minister Gabriel Attal to reconsider his resignation in the wake of the result.

There is likely to be continuing confusion since the Centre-Left refuses to cooperate with Jean-Luc Mélenchon’s Party which holds the most seats in the National Assembly.

France, like the UK, is unused to coalition Governments and a period of uncertainty is likely as the New Popular front tries to enact a series of policies that amount to higher taxes and higher public spending.

Melenchon has been dubbed the “French Corbyn” due to his radical left-wing views.

Political unrest caused the Eurozone Sentix Investor Confidence to drop sharply in July, falling from 0.3 to -7.3, significantly worse than the expected 0.0.

This decline ends a series of eight consecutive rises and marks a severe setback in market sentiment, which will have a significant effect on inward investment, which is already at multi-month lows.

Following the French election, the fallout from which is far from over, investors will be concerned about any right-wing resurgence in German Regional elections due to take place later this year.

As inflation continues to fall, albeit gradually, the ECB may consider a further interest rate cut, possibly in September, according to several bank economists.

ECB President Christine Lagarde has not learned her lesson from having made comments that were difficult to back away from in the lead-up to the earlier rate cut and may be forced into a “volte-face” having already said that it will be “several meetings” before the Bank will be able to cut again.

The Euro is attracting fewer and fewer buyers as it reaches the upper level of its recent range. Yesterday, it made a high of 1.0845 but quickly retreated to a low of 1.0802 before closing at 1.0823.

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.