High Inflation Interest Rate Hikes and a Recession
The UK has a problem in terms of inflation which is high compared to other major nations which we can see on the chart below with only Austria having a higher rate:
In terms of inflation Jeremy Hunt, the UKs Chancellor noted that ‘It’s not a trade-off between tackling inflation and recession, in the end the only path to sustainable growth is to bring down inflation’ as he expressed support for tighter monetary policy “even if the economy suffers.”
In terms of interest rates: “Another 1%, as is priced by markets, and all that talk of long and variable lags between monetary policy implementation and when it takes effect on the economy are ignored, yet again, recession seems certain. How high will Sterling climb from here before it starts falling? Given how much is priced into the curve, this is surely the last leg of the GBP rally.” (Kit Junkes)
The bank Rate is priced up at 5.50% early next year which is discounted by the market but if we do see these rate hikes unfold a long and deep recession is likely.
The market is focused on interest rates for the most part and ignoring there impact on the economy.
USD Bullish Fundamentals
The USD has the appeal of a good yield with bonds already at 5% and also offers safety in terms of it being the global reserve currency. The USD always does well when the global economy slows or moves into a recession, and we see big risks of a global recession at present.
We see rallies being held by 1.2400 and if we break below 1.2300 we expect a move down to 1.2000. The trend is down and has further to run in our view.