DXY Edges Higher Ahead of Fed Rate Decision

US Dollar Index sees six-month highs, English councils struggling to meet financial liabilities, and potential for Brexit deal rewrite.

The DXY has edged closer to six-month highs this morning, having appreciated over 105. This comes as markets await the Fed’s interest rate decision on Wednesday as well as the publishing of their dot plot to give some insight into where policy makers see rates moving forward. While markets have not priced in a rate hike – and generally concede that the Fed have achieved their terminal rate – hawkish rhetoric, an uptick in inflation and resilient growth give the central bank cause to hold rates for longer than previously expected. Moreover, according to the CME’s FedWatch tool, respondents have suggested that there is a 68.5% likelihood that the Fed will hold rates over their November policy meeting. Though the DXY is around 5% down on an annualised basis, it has risen 2% higher in the last six months and 1.8% over the past month.

In the run up to Wednesday’s policy meeting, last Friday’s close also saw pressure on US equities with The S&P 500 loosing 1.13% over the session, reversing its weekly advances. This came as yields on US treasuries rose in anticipation of the Fed’s latest move, with the two year (which is more sensitive to short term interest rate expectations) rising past 5% and 10-year settling above 4.3%.

All eyes now turn to the Federal Reserve Interest Rate Decision at 19:00 on Wednesday ahead of their press conference at 19:30 and PMI figures at 14:45 on Friday.

Rubbish Piles Up for English Councils

Earlier this month, Birmingham City Council (BCC) issued a section 114 notice, indicating that it could no longer meet its financial liabilities. BCC which runs a budget of £3.2bn, said that “in June, the council announced it had a potential liability relating to equal pay claims in the region of £650m to £760m, with an ongoing liability accruing at a rate of £5m to £14m per month. The council is still in a position where it must fund the equal pay liability that has accrued to date (in the region of £650m to £760m), but it does not have the resources to do so.” Legally speaking, councils have a requirement to balance their finances, and thus the section 144 was BCC’s last resort.

The financial collapse of BCC brought the fragility of many English Councils sharply into focus. Many now believe that it may be the canary in the coal mine for other distressed councils. According to The Economist, local authorities’ grants from Westminster decreased by a half between 2010 and 2021, with most councils raising taxes to try to fund the shortfall. Nevertheless, English local council’s core spending power still fell by more than 25%, with rising inflation driving up the real cost of providing services. Given that any raising of council tax by 5% or more would require a referendum, any council tax increases have not been able to keep in line with inflation. Councils including Stoke, Coventry, Somerset and Devon now appear to be in troubled water. Indeed, as the Economist suggests “More than 3m people in England are covered by councils that have gone bankrupt. More will join them; the only question is when.”

Starmer Would Seek to Rewrite Brexit Deal

Speaking to the Financial Times, the Labour Party Leader Sir Keir Starmer maintained that he would look to conduct a major revision to the UK’s Brexit deal as he seeks to build stronger relations with the bloc.

The existing deal – the EU-UK Trade and Cooperation Agreement – was signed on 30 December 2020 and entered into force on 1 May 2021. It covers preferential arrangements in everything from trade in goods and in services to intellectual property, public procurement, fisheries and judicial cooperation. However, since the Agreement is up for review in 2025, the current Leader of the Opposition believes that this would be an opportune moment to make amendments, if he were in office. Nevertheless, according to the FT, “many in Brussels see the 2025 review as simply a tidying-up exercise” and thus may not wish to entertain any further negotiations.