Beyond Currency

"Despite the Bank of England’s new-found determination to bring inflation under control, prices are continuing to rise and will continue to do so for some considerable time to come.

Having hiked rates twice already, it would be normal for the MPC to hold back on a third hike to give the earlier action time to have an effect. However, the pace at which prices have been rising coupled with both the tax increases and increase of the energy cap means that the bank doesn’t have the luxury of time.

The conflict in Ukraine has also added urgency to the situation, as the price of a barrel of oil hovers around $100. Russia’s invasion of Ukraine will be the first global issue that the UK will be reacting to independent of the EU. Since Brexit, the country is now free to establish its own parameters for sanctions, without being guided by Brussels.

London has easily the highest number of Putin allies owning property and businesses, so it is important that the British Government is able to exercise its independence in ensuring they do not slip through the net

While the Russian President clearly took the risk of sanctions into account when planning the invasion, the economy is already feeling their effect. The Rouble has collapsed and there has been a ban on foreign currency transactions being undertaken by individuals. Interest rates were doubled to 20% yesterday in an effort to stave off further speculation.

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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.

"In the end, the end of the Pandemic in England came without any fanfare, as the world has moved on from Coronavirus to another perhaps even more worrying event.

With the country still reeling from rising inflation, soaring energy bills and increased taxes, the effect on the country of the Russian invasion of Ukraine is still unquantifiable.

There is little doubt that it will deliver lower growth as the global economy, which will feed through into every developed nation.

BP announced yesterday that it will offload its 19.5% stake in Russian oil firm Rosneft following Russia’s act of aggression. BP commented that the decision had been taken amid unprecedented political pressure.

With a significant range of sanctions being introduced in response to Russia’s invasion, possibly the most significant will be the exclusion of the country from the SWIFT international payments network.

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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 task facing the Bank of England and other Central Banks has been made much harder by Russia’s invasion of Ukraine.

If the conflict in Eastern Europe continues for a period of months, the effect on the global economy could be catastrophic. As Russian tanks crossed into Ukraine yesterday, the price of a barrel of oil rose above $100 for the first time in seven years and the wholesale price of gas, which has already quadrupled in little over a year, rose by 60%.

With inflation in the UK already at 5.4% and rising. Just as the country is emerging from the Coronavirus Pandemic, another major situation has now arisen.

A further significant rise in the cost of energy will no doubt push inflation even higher than had been predicted, while if the oil price remains above $100, it will hit global growth hard.

The World Bank had already predicted that global growth in 2022 would be 4.1%. This was down from its earlier prediction in October of last year of 5.5%. There is little doubt that it will be revised lower again when the data is updated at the end of next month.

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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.

"Bank of England Governor Bailey was heavily criticized a few weeks ago for calling on workers not to demand inflation busting pay rises as prices continue to rise.

Yesterday, he continued in the same vein, but this time it was banks that were targeted. He called upon financial institutions to use restraint when deciding on the level of bonus payments.

He went on to say that the need for restraint applies to everyone, from care home workers to city bankers.

Testifying before the House of Commons Treasury Committee Bailey, who earns £575k a year told MPs, who rarely show restraint when awarding themselves inflation busting pay increases, that there is a real danger that inflation will remain at higher levels for far longer than had previously been expected.

Inflation reached 5.5% last month and is expected to peak at between 7.25% and 7.5% when household energy caps are raised in April.

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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.

"Several nations announced sanctions against Russia yesterday in response to its invasion of Ukraine. On the pretext of peacekeeping, Vladimir Putin ordered personnel and armoured vehicles into the two regions in the east of Ukraine that he recognized as independent states on Monday.

The response from the UK Government was to introduce measures against five Russian Banks in the UK, freezing their assets and three oligarchs known to have close ties to Russian President Vladimir Putin.

These measures have been criticized as being too weak in comparison to actions taken by other G7 nations. The Prime Minister countered those criticisms by saying that these are the first of many measures that are under consideration.

The Deputy Governor of the Bank of England David Ramsden spoke yesterday of the resilience of the UK economy, despite the scarring that has been caused by Brexit and Covid-19.

He believes that the Central Bank will need to increase interest rates further over the next few months, but the long-term path is difficult to predict due to the new uncertainties created by the conflict in Ukraine.

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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 Prime Minister announced in the House of Commons yesterday that from this Thursday, those who receive a positive test for Coronavirus will no longer need to self-isolate. He introduced a package entitled Learning to live with Covid. This will allow the country to return to normal.

This announcement was not received with 100% agreement. There was a lot of doubt expressed by opposition MPs. Scientists are concerned that withdrawing free Covid tests at the current time will affect the old and vulnerable, while support workers already struggling with low wages may be forced to forgo testing themselves.

The only positive note came from the business leaders group the Confederation of British Industry, which welcomed the move to allow businesses to fully recover from two years of real difficulty.

Johnson will chair a COBRA meeting this morning where the current situation in Ukraine will be discussed. With Vladimir Putin moving to recognize the sovereignty of two breakaway regions of Ukraine that are controlled by Russian-backed separatists, Putin now has a legitimate reason to advance his troops into those areas, ostensibly on a peacekeeping mission.

This is a dangerous escalation of the situation and brings armed conflict even closer.

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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 the MPC voted against a hike in interest rates last November, it is doubtful that they realized that their decision would lead them to the position they find themselves in now.

Inflation is pretty much out of control now and consumers are facing a further cost of living rise in the coming weeks. The rising wholesale price of gas has its origins in several areas of the global economy and cannot be considered to be due to a single event.

However, the timing of the significant rise in national insurance contributions is the brainchild of the Chancellor and is part of his plan to begin to recoup some of the expenditures that were seen during the Pandemic.

It is also supposed to provide further funding for the NHS, but it is not clear where the funds will end up.

The Prime Minister is making efforts to move on from partygate, despite being hounded by the press to answer whether he will step down should he be found to have broken the law.

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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.

"Bank of England Governor Andrew Bailey has been blamed for worsening the rise in inflation in the UK by Gerard Lyons, a former economic adviser to Gordon Brown and more recently Boris Johnson.

Lyons believes that the Bank’s failure to act before December in hiking interest rates has set back the recovery from the Pandemic, but, more importantly, placed the country in danger of falling into recession in trying to play catchup.

The rise in the wholesale cost of gas, driven primarily by the Pandemic coupled with the forthcoming rise in national insurance contributions, has placed the country in danger of slipping into recession.

Lyons also took aim at the Bank of England’s forecasting of the rise in inflation, which he says has constantly downplayed the seriousness of the situation. It appears that forecasts have been moulded to fit the shape of the MPC’s predictions, rather than the other way around.

Bailey’s communication with the markets has been ineffective. This has led to accusations of misleading them over a November rate hike.

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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 number of people claiming unemployment benefit in the UK fell to 31.9K in January, but the number for December was revised up from 43.3k to 51.6k.

The actual number of people claiming benefits is not as important as the trend, which continues to show a degree of tightness in the labour market.

Wages are beginning to pick up but are still well below the rate of inflation. That will have pleased Bank of England Governor Andrew Bailey, but it is expected that demands for greater increases, at least in line with inflation, will begin to be demanded.

Annual pay hit 4.3% in January, but vacancies are still at a record high. Bonus payments in the finance, insurance and property sectors boosted wages.

The rate at which salaries are lagging inflation is now at its highest level since 2014.Real wages, salaries adjusted to consider inflation fell by 0.1%.

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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 release of employment data for January is unlikely to have any significant effect on the market, since jobs data has now settled into a range that is positive but not dramatically so.

Average earnings remain steady well below 4%, but that may change when public sector bargaining begins.

The release of inflation data tomorrow will more likely see a reaction from traders. It is expected that inflation will have only risen slightly in January as signs that price rises are beginning to moderate are seen.

However, the price of fuel at the pump reached another record high yesterday as the tensions in Ukraine pushed prices higher.

Petrol averages 151.2 pence per litre, while diesel peaked at 151.57. This is marginally higher than the price that was seen last November, immediately before the price began to fall.

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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.