Beyond Currency

"The pound was particularly volatile yesterday as traders tried to decipher signals coming from the equity market regarding a potential bid from a U.S. private equity firm for the UK supermarket chain Sainsbury’s.

At times when U.S. firms are bidding for control of a UK entity, there is a mistaken belief that the buyer will need to buy a significant amount of Sterling to complete the purchase. The fact is that these deals, although valued in billions, are almost never cash transactions, and are never completed in a short time frame.

Therefore, any purchase of Sterling is unlikely to be a single transaction, or series of transactions, and even if they were, they would take place over such a long period as to have no effect on the value of Sterling.

The pound was particularly volatile yesterday as traders tried to decipher signals coming from the equity market regarding a potential bid from a U.S. private equity firm for the UK supermarket chain Sainsbury’s.

The next few months will see the pound to be driven by the market’s perception of the strength of the economic recovery from the Coronavirus Pandemic and the timetable for the Bank of England to begin to taper asset purchases.

"

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.

"Brexit could still bring issues for the UK in terms of being able to export to Europe.

Issues over red tape have been hidden amongst the several issues that have faced businesses as the economy has opened up.

The soaring cost of raw materials, shortages of parts, especially semiconductors, issues over migrant labour following Brexit, particularly in the hospitality sector are all unlikely to be solved in the short term.

Brexit could still bring issues for the UK in terms of being able to export to Europe.

Several representative bodies, including the CBI and Federation of Small Businesses, have been lobbying officials on both sides of the Channel to step in to cut the level of bureaucracy that is endangering their member’s very existence.

"

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 boom in the housing market that has taken place in the UK during the lockdown is set to push household expenditures higher as mortgage interest rates are set to rise.

This will be a new phenomenon for those who have entered the market over the past ten years or so who have had the luxury of both low interest rates and lenders competing to attract borrowers with fixed rate products.

The next five to ten years are likely to see a turnaround, with banks and building societies being obliged to scrutinize applications from an affordability perspective in a market which is likely to have topped out.

The boom in the housing market that has taken place in the UK during the lockdown is set to push household expenditures higher as mortgage interest rates are set to rise.

While this will be a relatively slow process, there it will have a significant long-term effect on the housing market, although a scarcity of stock will probably go some way to providing a balance.

"

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.

"Businesses in the UK are yet to find out what their part will be in the fiscal rebalancing that will be necessary as the country recovers from the Covid-19 Pandemic.

For that reason, bosses' union, The Confederation of British Industry is lobbying the Bank of England to hold off on any tightening of monetary policy until the burden on industry is known.

It seems that in common with other nations, UK businesses believe that inflation is the lesser of two evils when compared to the issue of the country’s recovery.

Businesses in the UK are yet to find out what their part will be in the fiscal rebalancing that will be necessary as the country recovers from the Covid-19 Pandemic.

The Bank of England has elevated itself to possibly the most hawkish of the G4 Central Banks following its most recent advance guidance on monetary policy.

"

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.

"Chancellor of the Exchequer Rishi Sunak has suddenly burst back into the political limelight after a few months trying to address the imbalance in the country’s accounts.

Fresh from having upset his boss by writing him a letter demanding a change in Government policy on travel restrictions, he has waded into the debate regarding working from home

It is becoming more prevalent that civil servants are returning to their desks, a move supported by Sunak who believes that the contacts he made in his early years would have been impossible without face-to-face contact.

Chancellor of the Exchequer Rishi Sunak has suddenly burst back into the political limelight after a few months trying to address the imbalance in the country’s accounts.

There is of course an opposite view that a cult of personality is more difficult to build through Zoom or Teams. This is a debate that will run and run through the service sector as the pros and cons are weighed up from both sides.

"

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.

"Chancellor of the Exchequer Rishi Sunak appears to have overstepped his authority, or at least misjudged the depth of his relationship with the Prime Minister.

He seems to have written to Boris Johnson to call for a significant easing of travel restrictions in order to speed the recovery of the economy from Coronavirus. Johnson appears to have taken the letter as both a demand that he should act and a threat that he is undoing Sunak’s work in saving the economy.

According to several weekend newspapers, Johnson was apoplectic with rage even suggesting that it might be time for Sunak to be moved from the powerful Treasury to a lesser role in health, which after recent events has become something of a poison chalice.

Chancellor of the Exchequer Rishi Sunak appears to have overstepped his authority, or at least misjudged the depth of his relationship with the Prime Minister.

While this may be an insight into the personal relationships that exist (or possibly don’t) between Cabinet Ministers, it is unlikely that it will mean anything in the long run and is synonymous with the summer silly season, when reporters have little else to do other than make mischief.

"

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.

"Yesterday’s meeting of the Bank of England’s Monetary Policy Committee confirmed that the process towards a reduction of support for the economy is about to begin.

The decision to leave interest rates unchanged at 0.1% was entirely predictable, while there had been a degree of speculation about the start of a reduction in the asset purchase scheme. In the end, it was left unchanged at £895 billion. There was just one dissenting vote. Inflation hawk Michael Saunders voted for a reduction in the level of asset purchases.

BoE Governor Andrew Bailey spoke at his press conference of the need for a modest tightening should the economy grow as expected. The ambiguity of that remark was not lost on analysts.

Yesterday’s meeting of the Bank of England’s Monetary Policy Committee confirmed that the process towards a reduction of support for the economy is about to begin.

Bailey has been outspoken about the fact that he believes the recent rise in inflation is transitory.

"

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.

"To start with a cliché, today’s Bank of England Monetary Policy Committee meeting is potentially one of the most important in living memory. Either that, or the MPC members will simply agree among themselves that the time isn’t right for a tightening of policy and the market will enter its summer lull, none the wiser.

As with most such decisions, the likely outcome won’t be as clearly defined. Just about every action, every word of Andrew Bailey’s statement, and his answers to questions in the subsequent press conference will be either open to interpretation or ambiguous.

The first of the ambiguities will be the votes. There is little doubt that the vote on a change to interest rates will be 9-0. There is no belief among MPC members that interest rates need to rise, despite inflation.

To start with a cliché, today’s Bank of England Monetary Policy Committee meeting is potentially one of the most important in living memory. Either that, or the MPC members will simply agree among themselves that the time isn’t right for a tightening of policy and the market will enter its summer lull, none the wiser.

It is likely that Bailey will continue to use the transitory mantra, but there are some who feel that unless dealt with, the return of inflation could be permanent and become a self-fulfilling prophecy which drives pay demands, particularly in the public sector, significantly higher.

"

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 third wave of Covid-19 to hit the UK, brought about by the Delta variant of the virus, appears to be on the decline as every form of vaccine that has been used appears to be effective against this strain.

While this is good news for the continued recovery of the economy, scientists are wary of another variant arriving to coincide with the winter flu season.

For this reason, analysts expect the Bank of England’s Monetary Policy Committee, which meets tomorrow, to keep support at its current level despite the possibility of one or two dissenters over the level of asset purchases in the current programme.

The third wave of Covid-19 to hit the UK, brought about by the Delta variant of the virus, appears to be on the decline as every form of vaccine that has been used appears to be effective against this strain.

Overall, the expectation for the MPC meeting is for a neutral outcome, with just a shade more optimism about the continued recovery.

"

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.

"Manufacturing activity in the UK fell from 63.9 in June to 60.4 in July. This was mainly due to technical difficulties like shortages of materials and supply chain bottlenecks, Despite the fall the recovery of the sector which now makes up a little over 20% of GDP remains strong.

Transport and labour remain the most significant issues, while the overall recovery has seen costs increase, which will keep inflation on the front burner.

Supply chain difficulties and shortages of raw materials are unlikely to be resolved until next year, and this will drive the pace at which the recovery takes hold.

Manufacturing activity in the UK fell from 63.9 in June to 60.4 in July. This was mainly due to technical difficulties like shortages of materials and supply chain bottlenecks, Despite the fall the recovery of the sector which now makes up a little over 20% of GDP remains strong.

This data may be a factor when the MPC meets on Thursday. It will allow those who believe that support should stay in place until the recovery is sufficiently robust to stand on its own, while the hawks will point to the inflationary effects of rising costs.

"

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.