Beyond Currency

"Data for consumer price inflation was released yesterday. It showed that the headline figure rose to 2.5%, its highest since August 2018. The median forecast was for a rise to 2.2%.

With producer prices which show inflation at the factory gate also rising, it is likely that rising inflation will be a feature of the economy for several months.

This could mean that the Bank of England has to review its strategy for supporting the economy into next year, as it could be forced to raise interest rates as soon as Q2 '22.

As central banks in the developed world switch policy from being proactive to reactive, this rising inflation was the issue that caused most concern. Since the recovery began in earnest, there have been conversations being had about just how far inflation can go."

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 Financial Policy Committee published its twice-yearly report on risks to the economy yesterday, together with several changes to measures that have been in place during the Pandemic.

The Committee performed several stress tests on the outcome of the Pandemic on the financial markets and its participants, and it was decided that with immediate effect, banks would no longer be banned from paying dividends to their shareholders.

This restriction was initially put in place in March of last year to protect banks’ capital base that was expected to come under pressure from the fallout of businesses ceasing to trade. The conditions were loosened a little in December and removed completely yesterday.

The Committee noted that for a few areas of the economy, asset prices are beginning to appear stretched. The most notable is the property market, where there has been exceptionally strong growth."

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.

"Andrew Bailey, the Bank of England Governor, remains relaxed about the prospect of inflation remaining above the Government’s 2% target for the foreseeable future.

Central banks in the developed world have all adopted a less proactive attitude to monetary policy, given the unpredictability of the recovery and how the withdrawal of various forms of support will affect growth and activity.

In the UK, the gradual withdrawal of various Government initiatives will bring unknown consequences, in particular to the property and employment markets.

For this reason, Bailey has to allow inflation to rise beyond its target level in order to be in a position to be flexible, leaving support in place if the economy dips, or beginning to taper if Monday's complete reopening drives inflation to levels which are considered to be unmanageable."

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.

"During the Pandemic, the UK saw a rise of 10% in online shopping. The previous 10% took seven years!

While that is one of the more obvious statistics you will read about the outcome of Covid-19, the question is, how quickly will the next 10% rise be seen, and how will that change the makeup of one of the most fundamental parts of life.

Meeting for a coffee then a mooch around the shops will be a thing of the past. We have seen that shopping for groceries is now done online by 29% of the population. And it is unlikely that the online juggernaut can be stopped.

The sea change in retail behaviour has already seen in several high street staples. It is likely that the major retail entrepreneurs are already hard at work deciding what their business will look like in 5-7 years.

They will no doubt get it right, as they will certainly decide how our retail habits develop. However, there is a whole class of retail outlet which cannot serve its clients online. The aforementioned coffee shop will suffer, as will many independent food and related outlets."

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 Governor Andrew Bailey is feeling more and more pressure to act to tighten monetary policy in light of rising inflation. He remains stoic in his determination to continue to support the economy, which he considers still to be at risk.

He is basing his desire to continue with bond purchase and historically low interest rates around the fact that Government support is slowly being withdrawn and that could have a significant effect on growth.

Employers are being expected to contribute more to the furlough scheme, and that will in all likelihood lead to a rise in businesses closing their doors permanently. There has been speculation for some time that without support, many firms are simply not viable.

The change in working practices that is seeing many businesses adopt a hybrid policy for working from home versus attending the office will also have a knock-on effect on support businesses. Cafés and coffee shops are the obvious victims, but there is a whole support structure that will see its customer base permanently decimated."

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 rise in cases of Coronavirus which is almost being ignored by the Government will start to concern the Bank of England if it continues for any length of time.

With most restrictions set to be withdrawn in under two weeks’ time, it will be difficult to halt, and although hospitalizations will remain low as a percentage of the number of those infected it will hit the economy hard if it continues for any significant period of time.

The Bank of England Governor has clearly set out his agenda for the beginning of tapering the Bank’s support for the economy, and his most obvious virtue is patience.

Andrew Bailey believes that despite the rise in inflation, even if it does reach 4%, as his former colleague Andrew Haldane believes, any damage to the economy will be transitory.

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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.

"Services output rose to its second-highest level in eight years in June. This is the largest part of the economy, making up around 80% of GDP.

Bank of England Governor Andrew Bailey in a speech yesterday criticized those sniping at the Bank for not seeming to take inflation seriously.

Turning poacher from gamekeeper, Ex-Bank Chief Economist Andrew (call me Andy) Haldane has already found his voice from the private sector, warning that inflation is rising rapidly and could reach 4% this year.

It seems you can take the economy away from the economist, but you can’ take the economist away from the economy!"

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.

"According to a recent Financial Times report, almost a third of businesses that traded with Europe have seen a drop-off in activity while 17% have decided to stop, some temporarily or for good.

The headline grabbing story concerning the sale of British sausages to Northern Ireland is now well known, but this slightly offbeat tale masks the real difficulties that are being faced by several sectors of the economy.

Boris Johnson has shown himself to be a Prime Minister who looks at the big picture, leaving the details to his minions. Happy to celebrate successes like the news that Nissan is going to expand production in the UK, he ignores issues facing fishermen who are now unable to make a living.

Nissan have been something of a bellwether for Brexit, as workers in the northeast of the country where their plant is mainly situated voted resoundingly to leave. Now they are joined in expanding production by Vauxhall Opel which is also reportedly planning an expansion."

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 true effect of Brexit on the UK economy has never really been felt. The Pandemic ran almost parallel with the UK’s departure from the Eu, so the slowdown in the economy was a combination of the two negatives.

Now, with the country on the verge of doing away with all restrictions in a little over two weeks’ time, analysts will be eager to better judge the way in which trade and availability of workers has been affected.

The so-called sausage war between London and Brussels, where the import of British prepared meat products into Northern Ireland is banned, is a headline grabber, but behind that is the issues businesses face in grappling with the requirements of the EU on a daily basis.

As the Pandemic becomes less of an influence on daily life, despite it taking several months to return to normal, whatever that may be, just how much of the UK’s trading output has been affected will become evident."

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 economy continues to rebound as more young people receive the Covid-19 Vaccination. The delay in the full reopening has had very little effect on the economy, while the race between the Delta variant and the number of vaccinations, is being won by the jab.

British factories are now seeing their strongest growth in forty years, but shortages of key parts and materials are likely to see price increases that push inflation close to 4%.

Another impressive statistic from a CBI survey published recently is that the growth in output appears to be spread across all areas of manufacturing and industry.

Of course, this needs to be considered in light of the fact that manufacturing now only makes up around 20% of total economic activity."

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.