"It’s the economy, stupid!” This famous mantra, coined by the political strategist James Carville, helped Bill Clinton unseat President George H W Bush in 1992, and now it explains another election. The economy played a critical role in the 2024 presidential race, creating the conditions not only for Donald Trump to trounce Kamala Harris and for the Republicans to gain control of the Senate and the House of Representatives, but possibly also for a counter-elite to usher in a new power structure.

The election’s outcome reflected two seemingly opposing views of the economy, both of which are correct. The interaction between them says as much about the basic economics-related strategies of the two political campaigns, good and bad, as it does about the state of expert economic communication in today’s America.

The message from voter surveys was unambiguous: The economy was one of the two main issues in this election (the other being illegal immigration). When asked for specifics, many said “inflation”; and if pushed harder, they reported being heavily influenced by what they see as excessively elevated prices and the lack of any sign that they are coming down.

The Trump campaign masterfully exploited voter dissatisfaction with the cost of living. Following Ronald Reagan’s example in 1980, they repeatedly posed variations of the question: “Are you better off today than you were four years ago?”

One reason why Democrats failed to respond is that they were obsessed by another (ironically correct) characterisation of the economy. The Harris campaign emphasised America’s “economic exceptionalism”, echoing a point that many professional economists have been making. The Democrats pointed to robust US growth, which has outpaced the rest of the G7, and to recent gains in real wages, owing to the decline in the inflation rate. And, of course, there have been multiple record highs in the stock market.

But this approach signalled to many voters that the Democrats simply did not understand what was going on, that they are fundamentally disconnected from pocketbook realities on the ground. On some occasions, they even came across as being full of hubris.

After all, a “K-shaped economy” means that improvements associated with robust growth are not evenly shared. Some sectors and households prosper; others struggle. Among those struggling the most are very low-income households that have exhausted their pandemic savings, maxed out their credit cards, have no financial buffers and, therefore, live with an unsettling degree of economic insecurity.

Michael Spence, the Nobel laureate economist, put it well at a recent lecture at the University of Cambridge’s Judge Business School. Pointing to data illustrating the financial fragility of the bottom half of the income distribution, he noted that such households hearing about economic exceptionalism from the traditional media may have one or more of the following reactions: “the media doesn’t know what it is talking about”, “the media is biased” or “the media is not to be trusted”. From these starting points, one can easily arrive at the belief that whoever is talking about the economy doing well simply doesn’t understand or represent one’s interests.

The Democrats also lost control of the narrative on inflation. It did little good to tell people that the rate of price increases, while still positive, had fallen sharply from its 2022 high when their concerns were with the overall price level. The cumulative effect of inflation has added to their cost of living and thus reduced their quality of life.

Similarly, record-breaking equity market runs mean little to households that own few, if any, stocks. Meanwhile, a housing price boom is far from a blessing for those seeking to buy their first home.

But the issue is not just how each party communicated to voters. The traditional expert economic consensus also has proved wanting, not least in its inability to describe clearly and widely the interaction between these two views. Mainstream economists also stood little chance of changing voters’ minds about the other big issue in this election: immigration.

By bolstering the US economy’s supply side, illegal immigration has, in fact, supported growth. But the experts who formulate the consensus economic opinion were never going to be able to communicate this to sceptical voters and even more so because they belong to a club that has taken one credibility hit after another for the past 16 years.

It started with the failure to anticipate the 2008 global financial crisis and subsequent Great Recession — which almost resulted in an even more devastating depression. Likewise, in 2021, the mainstream expert economic consensus insisted that the rise in the US inflation rate would be “transitory”, that is, temporary and reversible. But this view was upended when inflation continued to rise, peaking above 9% in June the following year.

This saga also served as a reminder of an unusual fact: the head of the world’s most powerful central bank, the US Federal Reserve, is not an economist but a lawyer. Would we have someone lacking in formal medical training put in charge of the National Institutes of Health?

All these threads are consistent with a broader theme that was apparent in this election. Not only has the “establishment”, including traditional media, taken a big hit, but the incumbent elites that have led this establishment are being seriously threatened by the rise of a counter elite. As the historian Niall Ferguson put it, this election was also a victory for “the new generation of builders whose autistic-virile qualities [Elon] Musk exemplifies”.

There are many important messages in Trump’s decisive victory and the down-ballot results. Democrats and the economics profesion would do well to heed them. — Project Syndicate

Source: Theedgemarkets

The British pound is steady on Tuesday. In the North American session, GBP is trading at 1.2678 at the time of writing, unchanged on the day. On Monday, the pound ended a six-day slide, during which the currency lost 2.8%.

Markets brace for higher UK inflation

The Bank of England has done an excellent job slashing inflation, which was in double digits for much of 2023. The September inflation report was a milestone as inflation eased to 1.7%, the first time it was below the BoE target of 2% since April 2021.

Still, the BoE is under no illusions that the tenacious battle against inflation is over. Services inflation has fallen significantly but is running at 4.9%, more than double the target. The Trump election win has raised deep concerns that Trump’s trade policy promises, with threats of tariffs on US trading partners, could lead to higher global inflation.

The BoE lower rates by 25 basis points on Nov. 7, marking the second rate cut in the current easing cycle. The September inflation report contributed to the decision to lower rates at that meeting and Wednesday’s inflation release will be closely monitored by the BoE, with the following inflation report coming out on Dec. 18, just one day before the BOE’s next rate announcement.

BoE Governor Bailey said in a report to the House of Commons Treasury select committee that the BoE needed to keep a close eye on services inflation, which remained above a level that was compatible with “on target inflation”.

Bailey also stated that he favored a gradual approach to cutting rates in order for the central bank to assess the effects of the government’s recent budget on growth and inflation. The BoE’s November forecasts indicate that the budget will result in higher growth and inflation in the near term, which could slow the pace of rate cuts.

GBP/USD Technical

There is resistance at 1.2707 and 1.2736

1.2629 and 1.2658 are the next support levels

Source: ACTIONFOREX

[Quick Facts]

[News Details]

[Today's Focus]

The Japanese Yen (JPY) witnessed good two-way price moves on Tuesday and ended the day nearly unchanged against its American counterpart. Russia's announcement that it would lower its threshold for a nuclear strike drove some haven flows towards the JPY. The global flight to safety triggered a sharp fall in the US Treasury bond yields and further benefited the lower-yielding JPY, dragging the USD/JPY pair to over a one-week low, around the 153.30-153.25 region. The initial market reaction, however, faded rather quickly after comments from Russian and US officials helped ease market concerns about the onset of a full-blown nuclear war. 

Adding to this, the uncertainty over the timing of further monetary policy tightening by the Bank of Japan (BoJ) continued to undermine the JPY and, to a larger extent, overshadowed a modest US Dollar (USD) weakness. The JPY remains depressed following the release of Trade Balance data from Japan and assists the USD/JPY pair to build on the overnight solid intraday recovery of over 150 pips. That said, speculations that Japanese authorities might intervene in the FX market to prop up the domestic currency, coupled with geopolitical uncertainties, might hold back the JPY bears from placing aggressive bets and act as a headwind for the pair. 

Japanese Yen bears look to seize back control amid fading safe-haven demand, BoJ uncertainty

Russian President Vladimir Putin approved the change to the country's nuclear doctrine on Tuesday, days after US President Joe Biden authorized Ukraine to use long-range American missiles against military targets inside Russia.

Russian Foreign Minister Sergei Lavrov said the country would do everything possible to avoid the onset of a nuclear war and called Germany's decision on Monday not to provide long-range missiles to Ukraine a responsible position.

Meanwhile, the White House said that the United States (US) does not plan to adjust its own nuclear posture in response to Russia's move, which, in turn, tempered safe-haven demand and weighed on the Japanese Yen. 

Bank of Japan Governor Kazuo Ueda earlier this week warned against keeping borrowing costs too low and signaled another interest rate increase, was vague on the timing and offered no hints about a hike in December.

A report published by the Ministry of Finance earlier this Wednesday showed that Japan's total exports increased by 3.1% and imports grew by 0.4% from a year earlier in October, resulting in a trade deficit of ¥461.2 billion.

Market participants have been anticipating slightly higher inflation after former President Donald Trump’s election victory, which was seen as a key trigger behind the recent sharp move up in the US Treasury bond yields. 

Federal Reserve Bank of Kansas President Jeffrey Schmid noted on Tuesday that large fiscal deficits will not cause inflationary pressures because the central bank will prevent it, though that could mean higher interest rates.

The US Dollar consolidates its recent pullback from the year-to-date high and languishes near the weekly low, albeit, the downside remains cushioned in the wake of expectations of a less aggressive easing by the Fed. 

Scheduled speeches by a slew of influential FOMC members later this Wednesday will influence the USD price dynamics and provide some impetus to the USD/JPY pair in the absence of any relevant US macro data.

USD/JPY needs to find acceptance above 155.00 to support prospects for further appreciation

From a technical perspective, the USD/JPY pair's overnight strong rebound suggests that the recent corrective slide from a multi-month high has run its course. The subsequent move up, along with the positive oscillators on the daily chart, supports prospects for a further appreciating move for spot prices. Bulls, however, need to wait for a sustained strength above the 155.00 mark before placing fresh bets. 

Some follow-through buying beyond the weekly top, around the 155.35 area, will reaffirm the positive outlook and lift the USD/JPY pair to the 155.70 intermediate hurdle en route to the 156.00 round-figure mark. The momentum could extend further towards retesting the multi-month top, around the 156.75 region touched last Friday.

On the flip side, the 154.40-154.35 area now seems to protect the immediate downside ahead of the 154.00 mark. Any further decline might continue to find decent support near the 153.30-153.25 region, or the overnight swing low. This is followed by the 153.00 round figure and the next relevant support near the 152.70-152.65 area, below which the USD/JPY pair could drop to the very important 200-day Simple Moving Average (SMA), around the 151.90-151.85 region.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Source: FXSTREET