30 June 2022: Weak Pound no benefit to trade

GBP – Prospective new MPC member in first interview

Swati Dhingra, who is set to replace Michael Saunders on the Bank of England’s Monetary Policy Committee, spoke yesterday of her belief that a weak pound doesn’t materially contribute to the nation’s trade position despite the fact that it makes UK exports cheaper to overseas buyers.

Dhingra, who was testifying before the Parliamentary Treasury Committee as part of the approval process before her acceptance as part of the MPC, remains sceptical about the UK’s departure from the EU and was an outspoken critic of the Government’s belief that leaving the EU will provide a significant boost to the economy.

Prime Minister Boris Johnson spoke yesterday of his readiness to light a bonfire under the EU red tape that has held back the economy As the MPC moves from quantitative easing to a new policy of quantitative tightening, Dhingra believes that the benefits to the fight against rising inflation are yet to be seen or fully understood.

Dhingra is likely to be an outspoken member of the MPC with a reputation for disregarding the voice of the collective.

Dhingra’s new boss, BoE Governor Andrew Bailey, acknowledged that the economy is being hit by a very large shock to real incomes as inflation continues to rise.

Speaking at the ECB’s annual Central Bankers Forum, also attended by Jerome Powell and hosted by Christine Lagarde, Bailey delved into the current volume of Central Bank speak. He acknowledged that inflation is too high, threatening that an increase in the tightening of monetary policy may be necessary.

This is despite it being widely acknowledged that a large part of growing inflation in developed economies is due to high energy prices, while supply is still failing to keep up with demand.

Today will see the final numbers for Q1 GDP released, with the already released rise of 0.8% between January and March unlikely to change.

Yesterday, Sterling came under pressure from a stronger dollar. It fell to a low of 1.2105, closing at 1.2121. It has now moved out of its recent narrow range and a further test of the 1.20 support is now on the cards.

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USD – Dollar strength marginally anti-inflationary

While Jerome Powell is at the ECB Central Banking Symposium, some of his FOMC have taken up the baton for an increase in the level of interest rate hikes, Following Mary Daly and John Williams who have already made hawkish speeches this week, Loretta Mester, the President of the Cleveland Federal Reserve, spoke of the need to get on top of rising inflation possibly by acting even more forcefully in tightening policy.

She went on to say that she is likely to support a seventy-five basis-point increase in the target Fed Funds rate at the July FOMC.

Meanwhile, Jerome Powell spoke of his belief that both households and companies are sufficiently strong to be able to deal with increasing interest rates and support the need to bring down inflation as a priority.

He believes that there is a path back to the Fed’s target of 2% inflation, with moderate growth and full employment.

However, the economy faces a tough few months while the Central Bank uses all the tools at its disposal.

Powell repeated part of the speech he used when testifying in Congress that the Fed can only affect one part of the economy, that being demand, while supply issues mean that higher rates won’t bring down the cost of a gallon of fuel or the rising cost of basic foodstuffs in shops.

It remains the base case of most economists that the U.S. will skirt the edges of a recession but will probably be able to post growth, albeit not particularly impressive, for the rest of the year.

Powell also commented on the strength of the dollar, which he rarely does. He acknowledged that a strengthening Greenback is marginally anti-inflationary, but it doesn’t form part of the Fed’s current strategy.

The dollar index rose again yesterday. It reached a high of 105.15 and closed at 105.10. With the June employment report not due for another week, the market will remain reactive to comments made by Central bankers and politicians.

EUR – ECB Head may implement tools at July meeting

In a change to her recent persona, it appears that Christine Lagarde may be about to become more hawkish of inflation.

She appears to have accepted that the fight against rising inflation needs to be fought without hesitation or distraction.

For the next few months at least, the ECB will concentrate on its efforts to bring rising prices back into line.

This will be music to the ears of the frugal five, which despite losing the cheerleader in chief, Jens Weidmann, remain committed to lowering inflation.

Lagarde will have listened intently to the speech made yesterday by Jerome Powell, along with recent comments regarding what Central banks can and cannot affect.

Lagarde also spoke yesterday of the need to fight the fragmentation that is beginning to take hold in the spreads expected to be paid by the more indebted nations of the Eurozone.

She expects to gain approval at the July meeting of the ECB’s Governing Council to implement the plans, which can hardly be called a tool, to reinvest the proceeds of maturing Government Bonds more strategically to try to create a levelling up of spreads.

This will almost provide a backstop to the bond market, which traders are almost bound to challenge.

Data for consumer confidence was released yesterday, and it confirmed the preliminary release as it remained unchanged at -23.8. It is hard to celebrate that at such a level it is beginning to level off, since at over -20 the numbers are truly appalling and reflect well the current issues facing the Eurozone.

The single currency fell back below the 1.05 level yesterday, reaching a low of 1.0435 and closed at 1.0443.