Beyond Currency

"It is tough to find any good news for the UK economy as the country leaves the Pandemic behind and begins the work of recovery. Workers are facing what the Bank of England Governor has called a historic shock to incomes.

The UK economy is primarily led by consumption. Consumers going out and making purchases keeps the country ticking over, so anything that creates stress for that sector quickly permeates through to the rest.

There is little doubt that Andrew Bailey is right in describing current conditions as historic.

The country had barely been able to complete its withdrawal from the European Union before the Pandemic hit, and now it faces an energy crisis not originally due to the conflict in Ukraine, but certainly exacerbated by it.

It is hard to imagine a scenario where an invading nation is so roundly condemned, yet the nations closest to the conflict are forced by circumstance to continue to trade with it. The fact that Russia had managed to skilfully make itself invaluable in supplying energy primarily to Europe had clearly been factored into President Putin’s plans as he considered the fallout from his actions.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"When he first became Chancellor, Rishi Sunak quickly became extremely popular as he oversaw several handouts to those most affected by the Coronavirus Pandemic.

The furlough payments and the eat out to help out scheme saw him cap a meteoric rise to be the Prime Minister’s major rival in any future leadership contest.

However, canny observers predicted a time when Sunak would expect the population to pay for his generosity.

In the year from March 2020, barely a single derogatory word was written about his performance, but suddenly he has become the pantomime villain, holding the country’s purse strings ever more tightly and facing accusations of throwing out crumbs to the people from his ivory tower.

Of course, as with most political stories, the truth lies somewhere in the middle. The handouts provided during the Pandemic were necessary to support the economy and had very little to do with generosity.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Central Banks are not usually noted for their level of innovation, and the current reaction to rising inflation is no exception.

Economics 101 states that in times of rising inflation, monetary policy should be tightened by contracting money supply via increased interest rates.

But this textbook was written to deal with the only type of inflation that had never been seen.

In the current environment, inflation has been created only on one side of the economy, with wages not having risen by any significant degree.

The UK economy has been significantly stimulated, albeit artificially, by the country’s emergence from the Pandemic.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The degree of uncertainty that has crept into the UK economy recently is continuing to grow. Data released yesterday showed that manufacturing output fell from 58 in February to 55 in March. Services, which make up 80% of activity, rose slightly from 60.5 to 61. While both sectors are still well above the line which marks a slowdown, this is expected to change going forward

Following the publication of the Chancellor’s Spring Statement on Wednesday, predictions for growth in 2022 have fallen to 2.2% while inflation, rising at its fastest rate since 1992, could reach 9%.

With the rise in inflation having so far reached 6.2% and living standard expected to fall to the lowest since 1955, the Government faces a tough summer as its popularity already dented by the Partygate scandal struggles to retain credibility.

An issue that has not been seen for some time is the matter of rising interest rates.

The housing market in the UK has been buoyed in recent years by the number of deals available from lenders that have seen prices rise. This along with the schemes made available by Rishi Sunak during the Pandemic has seen prices continue to rise.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The Chancellor delivered his Spring Statement to Parliament yesterday. The measures that had been carefully leaked were delivered but despite those, Rishi Sunak tried to prepare the country for worse economic news to come as the standard of living in the UK is set to fall to its lowest level since records began.

Sunak said that the post-Pandemic recovery had been blown off course by the war in Ukraine, although he did hold out the carrot of a tax cut in 2024 when, he says, the economy will be in better shape.

The cut in the basic rate of income tax from 20% to 19% was dismissed by the opposition as little more than an election gimmick.

They went on to condemn Sunak for not reversing the decision to raise the rate of National insurance by 1.5% next month, although he did increase the level of pay at which National Insurance would be paid from £9,600 to £12,570.

While the standard of living for most of the population will plummet, the cost of living continues to rise. Data released yesterday showed that headline inflation rose to 6.2% in February, up from 5.5% in January. The core rate of inflation rose from 4.4% to 5.2% over the same period.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The Chancellor will publish his Spring Statement tomorrow. He is facing pressure to do more than he wants to, to help households that face historic rises in the cost of living.

One of the measures that he is apparently considering is a cut of five pence in the duty that is charged on fuel. Duty currently makes up almost fifty-eight pence of the cost of a litre of fuel.

Having been credited with almost single-handedly saving households from disaster when the first Coronavirus lockdowns took place, Sunak is concerned about being seen as the person the country turns to in times of crisis.

Far from having a light touch on the economy, Sunak is being seen as a last resort when a bailout is needed.

It is not his intention that the Government should be looked upon to supply support at times when the economy is in a downturn, irrespective of the reason.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Data showing how much inflation rose by in February will be released on Wednesday, the same day as the Chancellor makes his Spring Budget Report to Parliament.

It is likely that inflation may have reached 6% last month as supply chains continue to creak and the price of energy continues to rise.

Globally, the era of low interest rates has ended, with only the ECB bucking the trend.

The Bank of England having hiked for a third consecutive meeting has sent out a message to the Chancellor that it has done all it can for now, although several observers will disagree, and it is time for the Government to wade into the cost-of-living crisis which could lead to a disaster.

Three rate hikes in a row would usually have had some effect on inflation, but these are far from certain times.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The Bank of England’s Monetary Policy Committee voted to raise interest rates by 0.25% at its latest meeting, which concluded yesterday.

The committee voted by a majority of 8-1 in favour of the hike. The only dissenting voice was that of Sir Jon Cunliffe, the Bank’s deputy Governor for financial stability.

The focus of the Central bank has switched latterly to fighting inflation despite the threat that the conflict in Ukraine brings fears of a slowdown in economic activity.

In its latest economic forecasts published last month, the Bank predicted that inflation would peak at 7.25% next month. That expectation has already been changed, and a peak of 8% has become the core expectation.

However, despite the Bank’s view, market analysts are raining their expectations almost weekly and have now reached 10%.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Today’s meeting of the Bank of England’s rate setting Monetary Policy Committee is now expected to hike interest rates for the third time in as many meetings.

The market is in little doubt that the Central bank is serious about trying to bring inflation back under control. However, it doubts its ability to do so, given the issues being faced by the economy.

The meteoric rise in energy prices that began even before Russia invaded Ukraine is one of several issues that need to be considered today.

Bank of England Governor, Andrew Bailey may even be justified in commenting that the oil price rise may be considered temporary unless the war in Ukraine carries on for a considerable time.

He is, however, unlikely to fall into that trap again given the criticism he faced over the way prices were affected by the bottlenecks created by the lockdowns.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Andrew Bailey is about to begin his third year as Bank of England Governor by leading the Central bank along the most complex path it has seen in a considerable time.

Bailey has faced criticism for not being capable of providing the right amount of advance guidance to the markets.

Bailey’s predecessor Mark Carney presided over an interest rate cut just four days before his departure, and then there was another cut in Bailey’s first week in the role. The Bank also raised the level of its asset purchases at the same time.

This earned the Bank plaudits from investors and commentators alike but proved to be something of a high-water mark for Bailey.

Since then, he has faced almost continuous criticism from the market and former colleagues.

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Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.