Fiscal Insiders: Monthly Update August 2024

Welcome to Fiscal Insiders: Monthly Update. Here we take a look back over what affected the market in July and let you know what’s in store for August. Here’s our portfolio manager Chris with everything you need to know.

A look back at July

July started with two big Political events starting in the UK where Sir Keir Starmer secured a monster majority victory for Labour in an election bloodbath for outgoing PM Rishi Sunak and the Tories.

Much of Labour’s victory appeared to be priced in for Sterling, with little reaction as results dropped in. Damage to the Tories was undoubtably done by Reform UK, with Nigel Farage claiming more than 4 million votes in just 4 weeks campaigning, setting his sights on Labour by finally claiming his seat as an MP at the 8th time of asking, with the party securing 4 seats in parliament. Starmer’s victory was by the lowest share of the vote ever won by a majority government as general turnout dropped to a 100 year low.

In France, President Macron went to the polls with a snap election which surprised many in efforts to gain further control, the decision initially appeared to have backfired as Marine Le Pen’s hopes of a far-right National Rally movement in France looked fruitful after the first round of voting, however hopes were soon dashed as left wing New Popular Front swooped to victory in a surprise win as the highest turnout since 1997 secured a coalition government for Macron joining NPF Leader Jean Luc Melenchon.

In the U.S there was more political turbulence as President Joe Biden announced he will remove his candidacy from the race for the White House, with a disastrous TV debate against Donald Trump being the final straw for senior Democrats in a woeful campaign from the 81 yr old. Vice President Kamala Harris was duly named in his place as Democrats backed her campaign to be America’s first female black President. Former President Donald Trump was also the victim of a shocking assassination attempt as he narrowly avoided a bullet to the head in Pennsylvania which left one audience member dead.

Sterling continued its impressive form in July, hitting a one-year high vs USD surpassing 1.30 after a poor US inflation print saw traders place bets on the FED cutting rates ahead of the BOE. We also saw the Pound hover at levels not seen since August 2022 vs EUR.

With UK interest rates at 16 year highs, and a new Labour government bringing political stability, Sterling has outperformed all major peers and looks set to have the highest increase of economic growth out of G7 nations but the end of the year.

What’s in store for August

August got off to a turbulent start with the Bank of England announcing its first rate cut since the Pandemic, with a 25 basis points cut to 5%. Inflation remains on target at 2%, although there remains concern amongst policymakers on services inflation which remains above 5%.

The Federal Reserve Bank kept their rates on hold as expected, however a shocking unemployment release at 4.3% which was the highest level since October 2021, alongside a poor Non Farms Payroll, has lead traders increase bets on the size of future rate cuts, with JP Morgan now pricing in 50 basis point reductions in both Sept and Nov decisions, they also see a 35% chance of a recession by year end in the worlds largest economy.

Recession fears in the US increased with an equities dump on Japanese markets, and tech stocks denting the Nasdaq and S&P 500. Heightened geopolitical tensions and disappointing economic indicators from major global economies have fuelled uncertainty and increased volatility.

On the Politics front markets remain cautious ahead of the upcoming in election as they see a much closer race than the polls suggest between Harris and Trump.

After its first rake hikes in a generation, the Bank of Japan has indicated that whilst markets remain unstable, the central bank will not hike rates, this is in contrast to Governor Ueda recent bullish sentiment, it remains to be seen if there will be further intervention from the central bank. China has received a recent inflation boost but tensions still remain high with the West as tariffs on Chinese goods look set to increase.

For Governor Bailey and the Bank of England all eyes will be on the next inflation reading as a barometer for when to cut rates next, with the majority of economists expecting some sticky inflation leading to just one further rate cut in November for this year. Historically speaking, August’s trim could be seen as going early as the Old Lady has tendencies to follow the FED with monetary policy. UK housing continues to show its robust growth with prices rising of late, often an indicator that further rate cuts could be on the horizon.

Last week’s stacked calendar of major data releases key for monetary policy decisions, included both US & UK inflation reports, UK GDP alongside retail sales. Figures released on Wednesday showed a 2.2% inflation rate, below the 2.3% expectation, with some economists suggesting there could be a link between inflation falling in July after rising hotel costs due to Taylor Swift concert in June leading to increased pricing in accommodation.

If you have any currency related questions about how news shared in today’s Daily Focus could affect your business, please contact us.

How can Fiscal FX help?

Market Orders

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.

Forward Contracts

For those looking to help 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 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.

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