Chamber Market Commentary – Johnson not in the clear… yet


February 2022: Monthly Currency Report

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GBP – Great British Pound
Rising output is beginning to look sustainable
Having made his second apology to the House of Commons in a week, Prime Minister Boris Johnson’s future is still far from certain.

A number of Government MPs are still considering whether to write letters of no confidence, which are a prerequisite to a vote on his future.

With a General Election still two years away, all the pressure on Johnson comes from within his own Party, with opposition calls for him to resign little more than hot air.

While the political pot continues to simmer, the economy continues to improve. Data released yesterday shows that manufacturing output continues to improve. While this sector only contributes to 20% of the country’s GDP, it is a major employer.

The effect of the Omicron Variant has been shrugged off while global supply chains continue to improve.

Many companies saw an improvement in their order books so far this year, while backlogs are beginning to be addressed as the availability of raw materials and spare parts improves. This should have a beneficial effect on input prices, which means that for the first time in six months, inflationary pressures may be beginning to ease.

The City is unshaken in its expectation that the Bank of England will hike rates for a second consecutive MPC meeting when the decision is announced tomorrow lunchtime.

Data for house price rises was also released yesterday. On an annualized basis, prices rose by 11.8% in January, up from 10.4% in December. However, the month on month rise in prices looks to be beginning to abate. Prices rose by 0.8 versus a 1% increase in December.

The tightening of monetary policy by the Bank of England is influencing the ability of borrowers to find advantageous terms on home loans. This will be one of the more obvious and visible effects of the Bank’s effort to slow inflation.

The pound is having a good week versus the dollar. It rose for the third consecutive session as last week’s fall has been erased. It reached a high of 1.3528 yesterday, closing at 1.3522.

USD – United States Dollar
Job vacancies continue to rise
Concerns over the pace of the recovery in the economy returned last month as data for manufacturing output showed that, due in a large extent to concerns over a fresh rise in cases of Omicron, activity fell from 58.8 to 57.6.

While output remains strong, it may have begun to level out as supply chain issues remain and inward investment will be hit by rising interest rates.

The Institute for Supply Management which collates the data is confident that this will be a strong year for manufacturing despite something of a rocky start.

Factory activity rose at its lowest level since late 2020 as all six of the major sectors showed that growth is likely to be moderate in the first quarter as issues with the supply of microchips remain.

Following the recent cut in its prediction for 2022 growth by the IMF, renowned Investment bank Goldman Sachs also cut its estimate this week. It was cut from 3.8% a month ago to 3.2% now.

As well as the remaining threat of Coronavirus and supply chain issues, Goldman sees the withdrawal of monetary support as having a more significant effect than has previously been predicted.

There has been growing unease about how long it took the FOMC to begin the taper of support, but the rush to complete this task to begin to increase interest rates is now open to question.

Historically, it is unusual for a Central Bank to change its outlook so dramatically, with the change from promoting growth to fighting inflation requiring diametrically opposed actions.

This year will see the Fed get serious about the effect of inflation; an issue that has not been seen since the millennium.

Traders continue to adjust positions ahead of this week’s Employment Report for January. Further clues will be given today with the release of the private sector jobs report. It is expected that a little over 200k new jobs were created. This would be a major fall from the December figure of 807k.

The dollar’s correction continues but is beginning to lose momentum. Yesterday, the index fell to a low of 96.23 and closed at 96.26. Support is around the 95.80 level, and this should be expected to hold ahead of Friday’s numbers.

EUR – Euro
Unemployment beginning to fall
Support for the Eurozone economy will no doubt be challenged by the more hawkish members of the Central Bank’s Governing council as data continues to be released that shows that the recovery is beginning to take hold.

ECB President Christine Lagarde will be accused of being too cautious in wanting support to remain in place until at least the end of the second quarter.

With inflation not yet being considered as out of hand despite Germany seeing price rises hit 4.9% without showing any sign of a slowdown, it is becoming increasingly obvious that the Eurozone is again suffering from a two-paced economy.

It was evident during the financial crisis that one size doesn’t fit all; a criticism that has been levelled at monetary union since its inception.

While several economies were built upon a high inflation, high interest rate model where government borrowing was virtually unfettered, the more financially disciplined nations looked on, confident that their model was more sustainable.

This belief has been shattered by the Pandemic and with the ECB battling to sustain lower interest rates in the face of inflation created by generous and continuing support, it will be virtually impossible to get the genie back in the bottle.

It is hard to imagine how the discipline created by limiting debt to GDP ratios and the introduction of caps on budget deficits can be introduced again since it will take many years for such discipline to return given the current level of Eurozone ratios which are close to an average of 100%.

It is unclear what the outcome of the Pandemic will be once the pressure has subsided and how the ECB will be able to divest itself of the bond purchases it has made to reduce the size of its balance sheet. The question will not be a matter of when, but more likely if.

Christine Lagarde will win the battle at tomorrow’s meeting, but she may not win the war as the hawks from Germany and the rest of the frugal five will jump on an improving economy to press for the withdrawal of support and a gradual tightening of monetary policy.

The euro rose against a weaker dollar yesterday. It reached a high of 1.1278, closing at 1.1268 as it has now comfortably broken back above the 1.1250 level which was the previous level of support.

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