3 January 2023: Highest rates for 14 years

One of the major issues of the Pandemic and Brexit has been the gradual demise of the High Street. It is estimated that 450 shops per day, of all sizes, closed during 2022. Another reason for the closures has been the rise of online shopping.

The British Retail Consortium has complained to the Government that they are not competing on a level playing field with online retailers, although there has been a great deal of if you can’t beat them join them from medium-sized retailers.

Quite often, the bricks and mortar shops are not beaten on price, but convenience and the ancillary costs of visiting high streets or shopping malls.

As we enter a new year, this is a phenomenon that looks irreversible as local authorities continue to increase business rates and costs of parking and public transport.

The Government has failed abysmally in agreeing free trade deals with its major partners since Brexit. They report that agreements in place with 63.1% of the country’s partners. However, no trade deal is in place with the U.S. despite an application being made in 2021.

Although there is no deal, trade between the UK and U.S. has risen by 15% over the past year.

Industrial action is set to escalate in the coming weeks and months, as relations between the Government and trades unions representing several groups of public sector workers remain frosty at best.

There is tier one data due for release in the UK this week, so traders will be either reliant on Bank of England officials providing some idea of the potential future path of Monetary policy, or giving some consideration where they see the path for inflation.

The pound will start the new year with little direction, as it spent the majority of December drifting around the 1.20 level. Longer term support is around 1.1550/10 while resistance comes in at 1.2280

The first week of the New Year will provide the dollar index with a degree of impetus as the minutes of the latest FOMC meeting will be published after the market’s close tomorrow evening and the December employment reports will be released on Friday.

The previous minutes provided the market with a major surprise and began the correction that was seen in the dollar index in mid-November.

As inflation has slowed, the Fed has begun to consider the effect of interest rates that are now restrictive. It will be interesting to note how many members of the FOMC remain hawkish in their outlook, as several commentators still see the economy falling into recession.

The Chairman of the Federal Reserve, Jerome Powell, spoke after the meeting of his belief that although the Fed remains driven by data, it can begin to consider reducing the increments of interest rate hikes.

The employment market has remained red-hot over the past few months, while several analysts believed that it would begin to cool. The period between August and November has seen the headline non-farm payrolls remain fairly constant at 277k. The market’s prediction for December is 200k.

This is due to the dampening effect of four consecutive interest rate hikes of seventy-five basis points, which took rates into restrictive territory.

The hike at the meeting, at which will see its minutes released tomorrow, was tempered to fifty basis points.

The minutes combined with the jobs data are likely to set a fire under the dollar index, as they are unlikely to be contradictory. It would be unusual, after having shown a more dovish side, if members of the FOMC said anything that was contrary to their reduction in the size of the hike made in December.

The FOMC meets again on February 1st, and the Committee will have a fair amount of information at their disposal to consider. The market is already considering that another fifty-basis point hike will be appropriate, although it is never wise to try to second guess Central bank actions.

The dollar index ended 2022 on the back foot and is likely to remain in that vein as the Fed begins to temper rate hikes while other G7 Central Bank’s still have accommodative short-term rates.

2022 was possibly the year when the Governing Council of the European Central Bank was at its most undecided. The EU was created as a union of two very distinct styles of monetary policy.

Firstly, there was a group that was led by Germany which found inflation abhorrent and practised an aggressive attitude to monetary policy which, for the most part, kept monetary policy restrictive in order to curb demand.

This attitude ensured that inflation was kept at bay, while it rewarded financial discipline such as saving by paying a commensurate rate of interest while borrowers were able to expand their businesses.

The other group headed by Italy, Spain and Greece were far less disciplined. They were much more used to high inflation and high interest rates, a kind of boom/bust situation in which they were constantly sailing close to the wind of default and devaluation.

Once the melting pot of the Union came into being, it was the more frugal economies that controlled things. After all, they complied with the golden rule, whoever owns the gold makes the rules!

This of course led to several crises, with a number of countries coming to the brink of bringing the whole edifice tumbling down.

In the ensuing period, there was a degree of contrition, but during and after the Pandemic several issues have resurfaced, mostly driven by the necessity to tighten monetary policy. As this has happened, Italy, in particular, stands on the brink of another crisis while the Germans and others are unprepared to help them out as they are suffering from both high inflation and an energy crisis.

The ECB is likely to hike interest rates at least for the entire first quarter until rates are at least neutral, while the more hawkish members of the Eurozone call for them to become restrictive.

The euro is likely to thrive for that period as interest rate differentials support the single currency, but as the economy begins to suffer, so will the euro. It has made positive strides in the past few months as the dollar corrected, reaching 1.0740. Resistance remains at 1,0780 while there is support at parity.

Have a great day!