Fiscal Insiders: Monthly Update July 24

Welcome to Fiscal Insiders: Monthly Update. This month it’s all eyes on Elections. We take a look back over what affected the market in June and let you know what’s in store for July. Here’s our portfolio manager Chris with everything you need to know.

A look back at June

June was an economic love story on the data front for the UK, as all three major data releases beating expectations.

UK GDP data released showed the economy grew at a faster pace than expected in the first quarter of the year, beating the 0.6% forecast with a 0.7% posting.  

UK inflation returned to its 2% target from the Bank of England, down from 2.3% in April as PM Sunak declared victory on the cost of living crisis with the lowest reading in almost 3 years. UK House prices also unexpectedly rose.

With headline numbers at target for the first time since July 2021, inflation paints a rosy picture. However, when we deep dive into the core and services readings at 3.5% and 5.7% inflation still remains soft under the hood, with food prices still 25% higher than January 2022 and petrol prices rising again. One further sour note for UK data with retail sales softening in June, with the unseasonably cold weather taking the blame.

The Pound hit two-year high’s versus the EUR in June, much of this was down to euro weakness caused by Macron’s snap election decision, alongside better than feared economic performance. Sterling is the best performing major currency this year against the Dollar down just 0.66% as it’s peers see significant losses.

Japan’s Central bank worries continue to damage its currency hitting 38 year lows against the Dollar. Losses of more than 12% this year are hurting Japanese consumers and businesses, with the significant gap in interest rates between the US heaping pressure on the Yen. Bank of Japan Governor Kazuo Ueda debates another intervention to shore up its currency to avoid surpassing current lows not seen since 1986.

The Federal Reserve Bank in the U.S held firm as expected, and the Old Lady followed as the Bank of England held rates at 5.25% for the 7^th successive meeting. With inflation back on target and the economy growing, many economists and investors are pricing in a rate cut for August when the Bank releases its quarterly monetary policy report and holds a press conference. The clamour for rate cuts is gathering momentum with comments from former Bank of England member Michael Saunders signalling that a rate cut “will likely occur in August”, as long as inflation and wage data keep up with forecasts.

The first presidential debate took place, and Donald Trump took full advantage of a weary and stumbling Joe Biden whose campaign now appears to be hanging by a thread, with some Democrats calling for to replace the 46^th US President in fears of losing the White House should he face Trump on 5^th November.

In Europe, French President reacted to a devastating defeat in European Elections by ordering a snap election, which saw Marine Le Pen’s National Rally (RN) take hold winning first round of voting with a 33.1% majority. The victory sends France heading for its most right-wing government since World War 2, with a left-wing alliance behind on 28% in the highest first round voting turnout since 1997.

On the home front, Prime Minister Rishi Sunak and Labour leader Sir Keir Starmer held battle for Number 10 with various televised debates. Sunak’s campaign appears to have been marred by gambling controversy amongst his own MPs and an unpopular absence during the 80^th D-Day anniversary, whilst Starmer appears to have played a smooth campaign avoiding any unforced errors to sail to a 20+ lead in the polls. Sunak’s repeated warning of a £2k tax increase appearing to hold little weight as voters learn their lessons from the “£350m a week” Brexit bus slogan used by previous Prime Minister Boris Johnson. Meanwhile, Reform UK leader Nigel Farage plots path to power with Trump-Style takeover of Britain’s Tories.

What’s in store for July?

The main event draws us to the UK Election on Thursday 4^th July, where according to polls we expect a new Labour government to take charge of Parliament with a large majority. Businesses appear to prefer Angela Rayner’s plan and with just days to go Starmer’s lead seems unassailable being 20+ points ahead.

The Bank of England takes a break from any monetary policy decisions this month, but will of course keep an eye out for the next inflation reading on the 17^th July to see if levels stay below the 2% target hit last month. Some economists see a potential uptick in consumer spending as England’s European Championships campaign gathers momentum, with spenders in buoyant mood as pubs, bars and restaurant reap the benefits.

There are however interest rate calls from both the European Central Bank and Federal Reserve Bank in July, after a reduction in policy to 4.25% its unlikely we will see a repeat from ECB President Christine Lagarde. We expect the same result across the pond with most economists forecasts the first cut in September from Fed Chair Jerome Powell. If any policymakers are to consider any potential change in policy, one piece of data members will be drawn to will be this Friday’s Non-Farm Payroll figure.

The Supreme Court of the United States takes centre stage, as it potentially looks to indict former President Donald Trump for his efforts to overturn the 2020 election that culminated in the Jan. 6, 2021, attacks on Capitol Hill, where Trumps mob of supporters did there best to stop Joe Biden taking office. However, time appears to be running out for any potential trial to take place (which could last up to 12 weeks) before Novembers election.

How can Fiscal FX help?

Market Orders

With upcoming elections in both the UK & France over the next week, there are many ways Fiscal FX can help you mitigate your risk;

Our platform offers a market orders facility where we can target desired levels outside of UK core trading hours. This tool is fundamental when taking advantage of market volatility in a tough economic climate, our clients have seen significant profit margins off the back of this product when compared with their competition.

We have seen in previous years gone by how much of an impact these political events can have on currency markets. Cast your minds back to 2016 with Brexit and Trump’s surprise victories both impacting Sterling significantly. History tells us that when it comes to politics the polls are never a certainty! Fiscal FX will be open 24 hours over the course of Thursday to monitor these movements which you can take advantage of.

Forward Contracts

For those looking to mitigate the risk of expected market volatility, then a forward contract may be the perfect tool, allowing you to lock in profit margins and fix your rates of exchange ahead of these big political events. Our risk management solutions are one of the main reasons clients utilise our facilities, the ability to fix rates ahead of upcoming projects. Locking in profit margins and lowering the risk of FX losses. It is important to note, that as with any financial product, there is always a risk. Talk to our portfolio managers if you have any questions on using Forward Contracts for your business.