Beyond Currency

The April employment report was published yesterday, and it showed that average earnings are still well above where the Bank of England needs to be to see inflation fall back close to its target of 2%.

The headline figure, excluding bonuses, grew year-on-year to 6.7%, up from 6.6% a month earlier.

The data shows that the economy is at something of an inflection point, with momentum beginning to turn, but that will likely come too late for the next Monetary Policy Committee Meeting.

The data has remained in the same “ballpark” for a few months now and this will concern the Central Bank since it is a sure sign that inflation is becoming imbedded in the economy.

The peak in wages may be close should the unemployment rate, which unexpectedly rose to 3.9% from 3.8% last month, continue to creep higher. Workers tend to become more satisfied with their lot as they become aware that new jobs are becoming scarcer.

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 is getting closer to being able to pause its cycle of interest rate hikes that have been running since December 2021 as food inflation has peaked according to several major supermarkets.

Having reached close to twenty per cent, and threatening to force the Central Bank into raising rates to a potentially dangerous level where they raise concerns over their effect on demand and therefore growth, prices of essential foodstuffs are showing signs of abating.

In a call with Bank of England Governor, Andrew Bailey, the heads of the major supermarket chains confirmed that prices are beginning to fall and are now at a stage where the lag between wholesale prices beginning to fall and retail prices steadying is taking place.

Given the need for supermarkets to fix prices for fresh items well in advance, the supermarkets face a challenge to balance what they are paying their suppliers and growers against what they are charging shoppers.

It is unlikely that the Government or Central Bank will feel comfortable and want to declare victory over inflation until there is tangible evidence that there is a significant fall in inflation which is still close to double figures.

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 the UK’s economic performance in the first quarter was nothing to write home about, it was still far better than was forecast just a few months ago.

Q1 GDP grew overall by 0.1%. Construction, which has seen a significant rebound recently grew by 0.7% while the services sector, the major engine for growth in the country grew by 0.5%.

Despite this improvement, the economy is still 0.55% smaller than it was pre-Covid, making it the only country in G7 that is yet to achieve its pre-Pandemic peak.

Month-on-month the economy grew in January and February but fell back in March as strikes by railway workers and NHS staff bit into performance.

Even the launch of the new registration in March failed to provide its usual annual boost to the automotive market, with new car registrations at historic lows.

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 composite Purchasing Managers Index which shows the output for the manufacturing and services sectors combined climbed further away from contraction last month, reaching 54.9 after a reading of 53.9 in March.

This places the threat of a recession firmly in the rearview mirror for the Government and should allow the Bank of England to continue to concentrate on bringing inflation down, closer to its target of 2%.

The Monetary Policy Committee meets next week with a decision on short-term interest rates to be announced on Thursday.

The PMIs are becoming a further economic indicator for analysts and the data for the construction sector will be published later this morning.

The expectation is for the sector to stay in expansive territory, but the data reflect the difficulties in this sector which is a vital component of the nascent recovery that the economy is experiencing.

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 fight against inflation that the Bank of England has been waging since December 2021 is likely to reach a crucial stage next week when it is expected that the Monetary Policy Committee will hike short term interest rates by twenty-five basis points.

There is no longer any mystery to the Bank’s actions as it set out its stall many months ago confirming that it will use tighter monetary policy as the instrument that it will use to dampen demand and by doing that reduce price pressures in the economy.

While commentators and analysts try to drive some interest in the MPC meeting, it has been obvious for a considerable time that interest rates were headed into restrictive territory. Traders have become immune to the rise in rates having any effect on the strength or otherwise of the pound, particularly as the tightening of policy has been a common theme throughout the G7 since the middle of last year.

However, following the Fed’s rate hike and somewhat dovish statement on future actions we may see some differential develop in Central Bank actions.

While journalists continue to present theories as fact, based on their own interpretation of the data, it now seems likely that rates have reached the level that is considered optimum.

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 inflation falling albeit too slowly for Andrew Bailey’s liking there is a growing belief that Rishi Sunak is the right man to lead the country’s recovery from the issues that to a certain extent have been self-inflicted.

Having achieved a workable agreement with Brussels that could see closer ties between the UK and EU, Sunak is trying hard to erase the circumstances that brought him to power.

He has put in place, in concert with Jeremy Hunt an economic policy that is expected, if given time to work, should lead the country back to some semblance of normality if not prosperity.

It is true to say that he contributed to the raging inflation that has gripped the country over the past eighteen months or so, by providing the support which, at the end of the day, saw the country get through the Pandemic.

He also was the first member of Boris Johnson’s Cabinet to resign in protest at his leadership.

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 again finds its independence under threat as the Government apparently wanted the new member of the Monetary Policy Committee to be from the Treasury.

Governor Andrew Bailey held firm in discussions with the Prime Minister and Chancellor of the Exchequer after it was agreed that Silvana Tenreyro would leave her role in two months' time.

It was agreed that the new member of the Committee should be Megan Greene, a candidate who is well known in the City as the Chief Global Economist of U.S. private investigations and advisory firm Kroll.

Bailey disagreed in principle with Jeremy Hunt over the appointment of Tenreyro’s replacement since he believed that it would send the wrong message to the markets. It was felt that his reporting of MPC decisions and his responsibility for testifying before the Treasury Select Committee could be second guessed by a member who has dual loyalties.

While the domestic housing market continues to falter, there was more bad news for the sector from commercial real estate which has seen a slump in activity as the economy continues to weaken.

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 has been raising short-term interest rates for close to eighteen months in an effort to slow demand and by doing that lower inflation.

It is only now that the base rate has reached a level that is restrictive on economic activity having been accommodative for many years. It is impossible to know without doubt when interest rates become restrictive, since it is as much about attitude as any economic data.

The Bank’s intention when it began its current programme of hikes in December 2021, was for rates to become neutral, where they are neither restrictive nor accommodative, as quickly as possible, without causing undue damage to the economy.

The question now for the MPC is how long do they wish for rates to be restrictive, while risking damage to the economy

It is now moot whether they could have been more aggressive in the size of hikes since there were several imponderables in play that drove their decision-making.

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 generally accepted that if a vote on Brexit were conducted now there would be an overwhelming win for remain.

This is more a testimony to the aggressive tactics used by leave campaigners at the time, compared to the underwhelming performance of remain.

Of course, there have been factors outside Brexit that have affected the economy since the country left the European Union, not least the pandemic, which to be fair, notwithstanding partygate, and other Boris Johnson related issues, the country handled fairly well.

The Pandemic should be viewed like a war. No one in Government had experienced anything like it before and decisions were made semi-blind, with little or no guarantee of success.

Brexiteers used jingoistic language, playing on people’s mistrust of European characteristics, which were an overhang of long since ended views.

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 Chief Economist Huw Pill, speaking on a podcast in the U.S. yesterday expressed his belief that the people of the UK need to wake up to the reality that they have no divine right to relative wealth.

He believes that workers and firms should stop trying to pass on higher costs by raising prices or demanding higher wages.

Until people accept that rising inflation has made them poorer, inflation will continue to rise. Simple economics shows that the UK as a significant importer of natural gas has seen its expense base rise exponentially, while its income from exports, mostly of services, has not risen as quickly.

If the cost of what you're buying is rising faster than what you are selling, you are going to be worse off.

This is causing the current flare up in inflation which is causing the Bank of England to continually hike short-term interest rates.

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.