Beyond Currency

"Any discussion about the prospects for growth in the UK economy going forward must be prefixed by concerns over the effect of the new variant of Coronavirus.

Nonetheless, the OECD published a report yesterday in which it states a belief that the UK economy will grow at the fastest rate of its G7 partners.

It predicts growth of 6.9% this year and 4.2% in 2022. Having fallen by the largest rate in the G7, these fugues may be a little misleading, but they are a positive signal despite this.

Boris Johnson and Rishi Sunak will doubtless welcome the positivity that this news generates, but the cloud that the new variant will produce over potential growth cannot be ignored.

Having withdrawn all the support he had provided to furloughed workers; Sunak will be looking into what may be necessary should Omnicom lead to another lockdown.

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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.

"It is expected that the UK will remain under the new set of restrictions until March next year, as the population suffers from a case of deja-vu.

As new cases of the Omicron variant are becoming known, the efficiency of the Covid-19 vaccines is yet to be determined. It is expected to take between two and three weeks for the results of tests to be known, which means that it will be just a few days before Christmas before measures can be put in place if needed.

The Prime Minister, speaking at a press conference last evening, pledged to offer a booster jab to anyone who wants one by the end of next month.

There are genuine concerns within the hospitality sector that if they are placed under new restrictions that the effect will be devastating for the sector.

With the economy beginning to emerge from the ravages of the first lockdowns, any further restrictions would see the country lurch towards stagflation, as the Bank of England is already facing pressure to raise interest rates.

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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 growing number of cases of the new variant of Coronavirus proves that the country is still a long way from being able to declare an end to the Pandemic. The Government has introduced stricter regulations regarding the wearing of masks from today, while yesterday it announced a change to who is allowed to receive a booster vaccination.

The goal is for as many members of the population as possible to receive a dose of the booster vaccination as possible, in an attempt to ensure that the country is able to enjoy as close to a normal Christmas as possible.

The scientific community believes that it will take up to three weeks to gather sufficient data to understand how effective the vaccinations that are currently available against Omicron are. If there are tweaks necessary, it could take another 100n days for those to be made, so it is becoming vital that any restrictions that are introduced be adhered to.

The economy was starting to show a level of activity that had been threatened by rising inflation, although there was still a degree of uncertainty surrounding the growth versus inflation question.

All through the Pandemic, Central banks have had to learn to be more reactive since predicting first, the full economic effect of lockdowns, and then how strong the recovery would be once the economy began to open up.

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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.

"There is a growing belief that the Bank of England will have little option but to hike rates at its next meeting. Throughout this year, Andrew Bailey has appeared determined to be in a position for the MPC to decide the pace of any monetary policy tightening according to its own agenda.

For that reason, Bailey has been at pains to talk down the threat of inflation and even now wants to make sure that a hike is absolutely necessary before he commits.

The Bank’s Chief Economist, who voted against a hike at the most recent meeting, spoke the other day of the burden of proof now being firmly on the shoulders of those who wish to wait and see.

Hugh Pill appears to want to take as much time as possible before making his mind up, although he does appear to be leaning towards a more hawkish stance.

Three of the independent members, Jonathan Haskell, Michael Saunders, and Silvana Tenreyro appear fairly clear in the view already. Saunders will vote for a hike. He has been in favour of tightening monetary policy for a considerable time, while Haskell spoke of the positives of a 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.

"Bank of England Governor Andrew Bailey has told the market that the Central Bank may not go back to providing hard guidance. Bailey was clearly stung by the criticism he received following the most recent meeting of the MPC.

He was accused of misleading the market by providing heavy hints that there would be a rate increase, only for the committee to vote 7-2 against raising rates.

It is hard to imagine what Bailey would gain from such a ruse and while he is the Governor, he is one of nine members who each have a view. Their independence is guaranteed by the fact that alongside the members of the bank’s senior management, there are four external members.

One of those external members, Jonathan Haskell, spoke yesterday of his view that a hike will become necessary if the labour market remains tight. In order for inflation to be controlled, higher wages will need to be matched by a commensurate increase in productivity, so the MPC will need to remain vigilant.

He went on to say that the path for interest rates is undoubtedly upwards, although he believes a rise in rates should be viewed as a symptom of economic recovery and not a panic move to control rising 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.

"The UK still sees 20% of its total exports finding their way to the EU despite Brexit. The rise in cases of Covid-19 that have led to fears of a new wave with lockdowns already seen in some EU states is likely to have a knock-on effect on the UK economy.

While the country is coping well following the introduction of booster jabs, there may very well be economic fallout even if there is no significant spike in cases.

The bosses' union, the Confederation of British Industry (CBI), is holding its annual conference, with the leaders of both main political parties making speeches.

Prime Minister Boris Johnson fluffed his lines, making a shambolic speech. He lost his place and made a rambling, almost embarrassing attempt to ad-lib, at one point commenting on a trip to a children's theme park.

Sir Keir Starmer managed to stay far more on point, calling for a complete economic reset following Brexit and the Pandemic. He promised that a future Labour Government would ensure that young people are retrained to be ready to be able to find employment as the economy changes its basic identity.

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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.

"It seems that every day that passes and every piece of data that is released points to a rate hike at the Monetary policy committee meeting that will be held of December 16th,

The Bank of England’s Chief Economist Hugh Pill voted against a hike at the last meeting, but in an interview on Friday he commented that the weight of evidence favouring a rate hike has shifted.

He said he is still uncertain about how he will vote, but that is more likely playing to the crowd, since it is unlikely that much will change in the direction of prices in the next three weeks or so.

Pill, another ex-Goldman Sachs employee who has found his way to the Central Bank warned against making assumptions about what the MPC is thinking. The reason that the MPC is constructed as it is, is to ensure as broad a set of views as possible. Because of this, there is no certainty that even if there is a hike that it will be within the fifteen to twenty-five basis point range that the market considers likely.

Andrew Bailey, the Governor of the Bank of England, has shown a more subtle tone when discussing inflation after being widely criticized following the most recent MPC meeting. Although he believes that the supply side of the economy is seeing temporary issues, he is also wary of wages beginning 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.

"A rise in interest rates at the next meeting of the Bank of England’s Monetary Policy Committee moved from Likely to probable yesterday as inflation data for October was released.

Headline inflation rose to a ten-year high of 4.2%. With the wholesale price of gas and other household bills rising, this is not expected to be the end of rising inflation, and the pressure on the bank to act has ramped up.

Household utility prices rose by 6.8% last month, while there were significant increases in most other sectors. Month on month, inflation rose by 1.1%, its highest monthly increase since 1993.

Andrew Bailey, the Bank’s Governor, spoke on Tuesday of the attention being paid to the employment data, but he must now be concerned that the next round of wage negotiations are going to be difficult and could lead to a more generalized increase in inflation.

With the ECB indefinitely on hold and the Federal Reserve unlikely to tighten until it has completed the withdrawal of additional support, the odds on the UK being the first of the major economies to hike interest rates will have fallen dramatically.

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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 UK Employment Report for October was released yesterday. It showed that vacancies are continuing to rise as the effect of the departure of migrant workers following Brexit remains a significant issue.

Following the end of the Government’s furlough scheme, the economy added 160k new jobs. This will provide a degree of relief for the Bank of England which had cited concerns over jobs as one reason that they had held off on raising interest rates.

The Bank could easily break with the tradition of not raising rates immediately before the Holiday Season by tightening monetary policy at its meeting on December 16th.

Andrew Bailey’s comment that every MPC meeting from now is in play as far as a rise in rates is concerned has sharpened trader’s interest. However, following the surprise that rates weren’t raised at the most recent meeting will add a degree of caution.

The unemployment rate fell from 4.6% to 4.3% as the claimant count also fell. A shortage of workers remains an issue that will exacerbate logistical issues caused by bottlenecks in supply chains.

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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.

"There are concerns that Brexit will be of greater long-term harm to the UK economy than the pandemic, and the fact that the negotiations over the Northern Ireland Protocol are continuing shows that the UK’s path to independence will be both long and complicated.

The EU cannot understand that a country would prefer to go it alone rather than remain a member of a group that provides exclusive access to the massive trading potential that the EU provides.

On the other hand, the UK Government believes that the restrictions placed upon member countries mean that the country cannot fulfil its potential to work independently with its traditional trading partners.

The two are still embroiled in a disagreement over what is called the Irish Sea Border, which exists in order to allow the free flow of goods between Unionist Northern Ireland and the Republic in the south.

Fears are growing that the UK will initiate the terms of Article sixteen of the agreement, which is designed to be used if the agreement is causing societal, economic, or environmental difficulties. The fact that goods arriving from the rest of the UK have to be checked at the border is felt by the Northern Irish authorities to be becoming unworkable, While Brussels fears a backdoor into the free trade zone could be created.

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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.