Beyond Currency

"The UK economy grew at 7.5% in 2021. This was the fastest rate recorded by any G7 member. However, having contracted at the fastest rate in the G7 the year before, this was to be expected.

Overall, taking the net of the two years, the UK placed fourth, having only just managed to return to the level it was at prior to the Pandemic.

Chancellor Rishi Sunak rejoiced in the pace of growth, while playing down the significant headwinds that the economy is facing.

April is beginning to loom large. It is the month that will see the implementation of the Government’s increase in National Insurance contributions. The Government’s cap in energy bills will also be increased. This means that even without rising inflation, household incomes are about to take a major hit.

The knock-on effect of this is that consumer spending will begin to fall as families make a decision that could be as stark as having to decide whether to eat or stay warm.

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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 effect of the Pandemic has masked issues that have been continuing to build in UK supply chains caused by Brexit.

As the Government announces the end of remaining restrictions, the UK’s departure from the European Union is set to become the major hurdle to growth and output.

UK exports to Germany fell in 2021 fell by 8.5% due, according to several major businesses, to the level of friction Brexit has brought.

Those same businesses believe that they are not seeing any benefit from Brexit, simply having swapped one set of bureaucratic red tape for another.

Boris Johnson announced at the start of Prime Minister's Questions in Parliament yesterday that the UK is on track to announce the removal of the last of the Coronavirus restrictions in two weeks, at least a month earlier than had been predicted.

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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.

"While the country continues to count the social cost of the Pandemic, the financial fallout is just beginning.

The National Institute of Economic and Social Research, the longest established research institute in the United Kingdom, predicts that inflation will reach a peak of 7% in April and go on to average 5.9% throughout 2022, and falling to 3.3% next year.

There are expected to be three more interest rate hikes his year with more to follow in 2023. The risk is skewed heavily towards the possible need for more hikes should inflation prove to be stubborn.

The institute criticized the Bank of England’s policy of remaining reactive to inflation rather than getting ahead of the curve.

It is easier to look back to see mistakes that have been made. In real time, making decisions about the direction and ferocity of the rise in inflation coupled with providing sufficient support to ensure that any nascent recovery is not choked off is more difficult.

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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 withdrawal of support for the housing market has levels of stock finally begun to see a cooling of prices and stock levels. Although January is traditionally a slow month for the market, data released yesterday showed that a levelling off of prices is taking place.

Last month saw overall house prices rise by just 0.3% versus a 1.1% rise in December and a market expectation of a rise closer to 1%. This left the annual rate unchanged at 9.7%.

The rise in the cost of living that will begin to bite in a couple of months will also have a cooling effect on house prices as potential buyers decide to stay put.

This week will also see the release of a slew of data that falls into both the rear-view mirror and leading indicator categories.

GDP data for December and the fourth quarter will be released. While the annualized figure will most likely be a very healthy 6.4%, on a monthly basis, growth is expected to have slowed by around a half of one percent.

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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 suffered from the exposure he has received as Central Banks return to the forefront of economic decision-making.

The post financial crisis period saw Central Banks move into the background as interest rates fell and inflation appeared to have been beaten.

That entire period of the cycle was ended by the Coronavirus Pandemic and the monetary and fiscal support that was needed to protect the economy from lasting damage.

Prior to the pandemic, many members of the public would have been hard-pressed to identify Bailey, such was his lack of publicity.

That has changed gradually, culminating first with his being accused of misleading markets over the possibility of a rate hike last November when he badly misjudged the mood of his Monetary Policy Committee.

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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 raised short-term interest rates by twenty-five-basis points. This is the first time it has seen fit to hike at consecutive meetings since 2004.

The MPC also warned that inflation is set to climb above 7% Hiking by 0.25% having raised by 0.10% in December, the bank hopes that it has sent a signal to the markets that it is serious about fighting inflation.

At a number of meetings last year, the sentiment of Governor Andrew Bailey’s comments centred around the expectation that the Central bank wanted to remain in control of its own destiny. In that it wanted to be able to withdraw support for the economy at its own pace.

The basic fact remains that as soon as Central banks start intimating that the time to hike is approaching, in all probability they are already too late.

Bailey’s agreement with Fed Chairman Jerome Powell that inflation was simply transitory and would be limited to the supply side of the economy has now returned to bite him. How he must wish he had been firmer in expressing his wishes for the cycle of higher rates to have started last November.

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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.

"Although there have been a few Government MPs who have stated their intention to write letters of no confidence in Boris Johnson’s leadership, the open revolt that was feared has not, so far, materialized.

Johnson faced another fiery Prime Minister’s Questions in Parliament yesterday but appears to be weathering the storm with tenacity.

Policy investigations into several events held in Downing Street are ongoing, and the full version of Sue Gray’s report is yet to be seen, but it is now possible that this story may now be overtaken by the next drama with the Prime Minister injured but not fatally so.

To move on from Partygate, the Minister for Levelling up, Michael Gove, announced the release of the Government's plans to ensure investment is more evenly distributed.

A cynic would no doubt agree that the best way to move on from a scandal is to make promises of greater investment

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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.

"Having made his second apology to the House of Commons in a week, Prime Minister Boris Johnson’s future is still far from certain.

A number of Government MPs are still considering whether to write letters of no confidence, which are a prerequisite to a vote on his future.

With a General Election still two years away, all the pressure on Johnson comes from within his own Party, with opposition calls for him to resign little more than hot air.

While the political pot continues to simmer, the economy continues to improve. Data released yesterday shows that manufacturing output continues to improve. While this sector only contributes to 20% of the country’s GDP, it is a major employer.

The effect of the Omicron Variant has been shrugged off while global supply chains continue to improve.

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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.

"City traders polled about the Bank of England’s intentions at this week’s Monetary Policy Committee meeting are certain that there will be another 25BP hike this Thursday. This will be the first time there have been consecutive increases since 2004.

The hike is now 100 priced into the interest rate markets. This is an increase on last week when the expectation of an increase was 90%.

With inflation at its highest level since 1992 traders are experiencing historic events that are outside the experience of many.

Inflation is currently closing in on 6%. The latest official data put the headline rate at 5.4%, but prices are clearly continuing to rise at a rapid rate. The employment market is also booming with the unemployment rate 4.1% which is close to historic lows.

Speculation is growing about what official rates will be at the end of the year. It is possible that they could have risen as high as 1.75%, but most see a rate of 1.25% at year-end.

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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.

"Tackling inflation remains the number one priority for the Bank of England’s Monetary Policy Committee, since it was forced to accept that rising prices were unlikely to return to the Bank’s 2% target without changes to monetary policy.

Bank of England Governor Andrew Bailey was one of several central bankers who jumped on the bandwagon of labelling rising inflation as transitory and that it would return to acceptable levels once the logjam in supply chains had abated.

The continued rise in the wholesale price of gas, exacerbated by tensions around Russia’s border with Ukraine, and global shortages of microchips have been major contributors to rising inflation. This week, the MPC will have a decision to make that was expected to be relatively easy before the New Year.

Rate hikes at consecutive meetings were, and in many; observer’s minds, remain the likely outcome of the meeting on Thursday. This would be the first time in eighteen years that the Bank of England has hiked at consecutive meetings.

However, various headwinds are growing that could easily blow the nascent recovery off course.

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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.