Beyond Currency

"The Bank of England will hold the first meeting this year of its Monetary Policy Committee next week. Until recently, it had been fairly certain that the second rate hike of the new cycle would take place, but the growing headwinds being faced by the economy have put that in jeopardy.

The continued rise in the wholesale price of gas is the single most significant issue. Many household bills are expected to double when the Government’s price cap is adjusted in April

As Boris Johnson awaits his fate to be decided by the report being prepared by Senior Civil Servant Sue Gray into activities in Downing Street during the first lockdown, he caused something of a stir yesterday by refusing to confirm that the rise in National Insurance contributions that is also due to start in April would, in fact, go ahead.

This is vintage Johnson, pulling a rabbit from the hat without having first discussed the notion with his cabinet colleagues.

The Business Secretary, Kwasi Kwarteng, speaking yesterday at the site of a third nuclear power station to be built on the Suffolk coast, confirmed to the press that there was to be no change to the Government’s plans to raise the basic rate of national Insurance contributions.

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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.

"Inward investment into the UK is still at a very healthy level but is not being matched by direct investment into businesses by the companies themselves.

While 50% of investors believe that the attractiveness of the UK has improved over the past quarter, only 30% of business owners agree.

Supply chain difficulties, rising energy costs, finding suitable employees, and rising wages are all factors that are making businesses hang on to what they have, rather than invest in their futures.

One of the most obvious areas that is being neglected is investment in new machinery. There has been a significant drop in the level of retooling, which is delaying the creative process across several sectors

Prime Minister Boris Johnson appeared to have refined a degree of his bullish bluster at yesterday’s Prime Minister’s questions in the House of Commons.

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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 air of anticipation that is growing around Parliament has been ramped up further as it was announced yesterday that the Metropolitan police are looking into the events that took place in Downing Street during the first lockdown.

The report that is being written by the country’s senior Civil Servant, Sue Gray, is due for publication in the next few days and the feeling is growing that Boris Johnson’s days may be numbered.

Johnson faces further ridicule from the Opposition Parties as he takes Prime Minister's Questions in the House of Commons later today.

If the internal report is anything like as bad as is being speculated about, the police investigation, even if fines are issued, will be something of an anti-climax.

The IMF produced its latest World Economic Outlook yesterday. It downgraded its prediction for full year growth in the UK from 5% to 4.7%, citing the increase in energy costs and the lingering effect of Omicron as its main reasons.

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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 released yesterday for economic activity in January showed that the effect on the economy from the Omicron variant will be moderate. It is predicted that the imposition of Plan B of the Government’s strategy will cost less than 1% of GDP.

The report also showed that costs continue to rise at near record levels. This reinforces the view that the Bank of England will again hike rates at its meeting next week.

One piece of good news is that pressure on supply chains appears to be past its worst. While headline inflation is expected to continue to increase in the first quarter, the report reinforces the view that price pressures will begin to slow from April onwards.

Prime Minister Boris Johnson has adopted a business-as-usual approach while he anxiously awaits the outcome of the investigation into activity in Downing Street during the first lockdown.

Yesterday, it appeared that there was a gathering to celebrate Johnson's birthday, held in June 2020. It is apparent that the event was attended by around thirty staffers and lasted up to an hour.

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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 will meet at the end of next week, and it is highly likely that they will decide to hike interest rates for the second time in successive meetings.

The consequences of the committee’s relaxed attitude to ring inflation last year are now being felt throughout the economy. Andrew Bailey when asked about rising inflation was certain that the rise was transitory and would fade as soon as the economy was fully open again.

While Bailey was one of the more sanguine Central Bank Heads, the fact that once he had come to terms with the fact that inflation was not going away but actually continuing to rise, he was then accused of misleading the markets by pre-empting a vote. He was fairly certain that there would be a hike agreed at the November meeting, only for his colleagues to vote to maintain rates at 0.1%.

The fact that the Committee voted in Favour of a hike at the December meeting, the timing of which was unusual in itself underlined the fact that they got it wrong in November.

There is no doubt that the advent of the Omicron Variant of Coronavirus created uncertainty, particularly as the scientific community continually warned about its consequences.

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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 expressed his concern yesterday about the pace at which inflation continues to rise.

Having already hiked interest rates once, at its meeting in December, the Monetary Policy Committee is expected to agree to three more hikes throughout 2022.

Bailey has two main concerns; first he is worried that energy prices continue to rise, the wholesale price of gas has quadrupled in the past year, and inflation concerns being expressed in wage negotiations.

For now, wage rises are both manageable and fairly limited, but that is certain to change as Trades Unions begin to try to ensure that the pace of wage rises for their members keeps up with rising prices.

In evidence to the Treasury select Committee, Bailey warned that it could easily be the second half of next year before energy prices start to ease back,

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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.

"Prime Minister Boris Johnson disappeared from public view yesterday as he licked his wounds following the mauling he received from all sides following his mea culpa on Wednesday.

It was ironic that the reason for Johnson’s withdrawal was that he was self-isolating following news that one of his family has tested positive for the virus.

Even without its main player, this drama is far from over, as the result of an inquiry into activities in Downing Street during the various lockdowns is eagerly awaited by all sides.

While Johnson isn’t exactly hanging on by his fingertips and he received support from several of his Cabinet members yesterday, his position is still tenuous

Retail sales data for the Christmas period were released and several outlets recorded very healthy numbers, over the holiday period. Marks and Spencer fared extremely well, as did Tesco. Both of the retail giants expect to announce strong full-year profits.

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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.

"Like for Like retail sales data was released yesterday, and it showed that consumers were concerned by the rise in the Omicron variant but more so about rising inflation. Year-on-year, sales rose 0.6% against a rise of 1.8% in November.

Economists at the British retail Consortium believe that the soaring cost of living will have a significant effect on the retail sector. With higher taxation, continual increases in the cost of energy, and rising inflation, the outlook for the first couple of quarters is unlikely to be positive.

There is some good news in that the level of infections is showing signs of having topped out, but household costs will also start to be affected by rising mortgage rates as fixed term deals begin to expire.

Households face a rise in the cost of their mortgages, a phenomenon that hasn’t been seen by many for several years, and in some cases facing a higher cost of financing a property purchase is new.

So far, the housing market has held up well following the withdrawal of support in the shape of a Stamp Duty holiday but as the economy slows and inflation rises, there is sure to be an effect on the volume of sales and this could lead to a lowering of prices.

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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.

"With the Government’s Chief Medical Officer making optimistic noises about the peak of the Omicron variant of the Covid-19 virus, Boris Johnson’s decision for England to move to plan B looks like it could be vindicated.

The daily number of new cases while high is levelling off and with the vast majority of hospitalizations being those who have not been vaccinated, the country may be on the cusp of seeing the light at the end of a very long tunnel.

Data showing the performance of the economy in December and January is expected to show only a mild hit from the virus. The call to encourage people to work from home is possible and to go back to wearing masks seems to have been sufficient to slow the pace of infection.

The biggest risk over the next month or so will be the risk of the NHS becoming overwhelmed as it is hit by relatively high numbers of hospitalizations coupled with high levels of staff absences.

The effect of Omicron on GDP is expected to be around one month, that is to say that by early spring, the country’s level of growth will be what it would have been without the variant having emerged.

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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.

"Cases of the Omicron variant of coronavirus continue to cause concern that the NHS is going to be overwhelmed, while the number of people self-isolating remains a threat to the economy.

Health Secretary Sajid Javid spoke over the weekend of his belief that the peak of infections may have been reached in London, although he expects that in the rest of the country cases will continue to rise.

It is still likely to be a few weeks before Javid’s hopes can be confirmed, while the next cab off the rank as far as issues facing the Government is concerned will be the continued rise in the wholesale price of gas and its effect on the cost of living.

Boris Johnson is already under pressure to approve a reduction in the level of VAT charged on household energy bills while suggestions are being made that the large energy companies are charged a green tax on their profits.

With inflation unlikely to fall back to anywhere close to the Government's target and the bank of England already committed to a cycle of interest rate increases, household bills are expected to rise sharply in the coming year while disposable income is hit by increases in taxation.

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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.