Foley: UK Economy Looking Healthier Now

I my read of the Bank of England governor’s comments is that he was quite dovish. I mean, saying things like it is likely we’ll need to cut the Bank rate, we will need to make policy less restrictive. All of that ties in to this narrative that they have really turned quite dovish at this point, haven’t they? Well, would certainly agree with you mean even there just remarking that June was not afraid to complete actually means that considering the possibility of a move in June, which is more than many people had anticipated, including ourselves. Now we’re still thinking August is more likely, but in our views, the odds of the June move have increased because of that comment. So yes, I would agree, really quite damaged. But there was also a line of optimism really in the Bank of England’s commentary if you consider his GDP forecast for instance. And if you compare that perhaps to the end of 2022 when the Bank of England was looking for you know a five quarter recession, something that that didn’t actually happen. The the the tone for the UK economy, the outlook for the UK economy looks much healthier now than it used to back then. And and that is I think a a positive medium long term signal for the UK economy despite the dovishness in in in yesterday’s tone. Yeah Jane, but the other take away from central banks over the last six months is they still are very much data dependent. We saw how the Fed had to change tack the last couple of months and I just wonder whether in the market is once more getting ahead of themselves because between now and June we still have another two inflation reports to get to and two more labor market reports to get through as well. So what if those surprised the upside? Well, if they surprised to the upside, I think it’s quite simple. And then then they won’t cut probably until August. So you know everything is in the balance and I think market pricing is reflecting that now. So those two sets of economic data that we’re going to see that that maybe pointed to are really going to be very, very crucial. But in in a way that’s how a central bank should be acting. They can’t be in a pre position in themselves for June when there is so much still at stake. So if the trend carries on, if inflation carries on coming lower, then yes, it seems likely that we will definitely have a card if not June in in, in August. But you know there’s labour market numbers to date have still been a little bit sticky. When I, when I say that I’m referring really to that the services inflation number for the UK that’s still at 6% which does really reflect a lot of the the the, the labour market tightness in that services sector in the UK economy. But there is a risk that that labour market is now loosening and and actually that certainly numbers like vacancy per unemployed person could really start dropping quite rapidly. So those sorts of numbers are really going to show us whether or not this move is going to be in June or in August. Yeah, Jane, can we talk about the price action yesterday? I was a bit surprised to walk in this morning and see the pounds. Well cable versus USD traded firmer towards the afternoon and into the close of the session. And I wonder what you point that down to. Is it just a case of stretch positioning? Well, I think there’s a few things in that. And the first thing we got to remember also is, is that the initial claims data that we saw yesterday afternoon for the US now that really did put September back in the frame as a possibility for the Federal Reserve to to cut interest rates. So we saw the dollar softening on the back of that, of course almost the board. So that was something that certainly allowed Cable to regain it its footing yesterday afternoon. But again, if we step back and look, for instance at sterling against the euro, yes, it is traded still above that 86 level this morning, which is outside the range that is dominated since January. But I would agree that I think sterling has held up pretty well given those Staffish comments. And I think that that reflects the fact that the whole outlook for the UK economy remains much firmer than it was. Again, if we step back even further and and we look at the performance of sterling this year, it’s the second best performing at G10 currency after the dollar. Last year it was the second best performing currency after the Swiss franc. That I think is because it came off very, very weak levels at the tail end of 2022. And I think over the medium term we can carry on this very slow grind to recovery, even if the near term picture is dominated by this interest rate differential sort of noise if you like. Well, end of 2022 I get shuddered down my spine remembering what happened to UK assets around Then Jane, I want to switch tack because many FX traders are keeping a close eye on what’s happening with dollar yen. I also think it’s interesting there that despite the fact that the Bank of Japan did two rounds of interventions, we’re still sitting at around 1:55 at $4.00 yen. Why were those interventions absorbed so easily by the market and why can’t the yen rally versus the USD? I think it’s quite simple. I, I think the market keeps on coming back to those interest rate differentials. I mean if you like the initial claims data yesterday that’s softening off the dollar, you know, helped the Bank of Japan help the ministry finance out a little bit. But at the end of the day, the market’s still thinking, well, look, even if the Fed do cut interest rates in in September, well, interest rate differentials are still favoring the US dollar. So, but we need to get either much weaker U.S. data or much firmer Japanese data. And unfortunately the data that we got from Japan yesterday morning which was the real wages was really disappointing. Now that’s exactly the sort of data that the Bank of Japan need to strengthen because their Holy Grail is domestically driven inflationary pressures and and that really stems about wages and those real wages still negative means that consumers are still going to be up against it when it comes to purchasing power. It just seems to me that unless the Bank of Japan see the urgency to start normalizing then we’re going to stay in this holding pattern. And I think that’s probably you know the the observation that everybody else in the market that has been making which is why dollar yen is, is right up there. So we did have some hawkish remarks or some attempts at hawkish remarks from the Bank of Japan Governor a couple of days ago but without the strength of that domestically driven inflation data. Well you know that that those comments you know lacked that sort of power that perhaps they need to turn the end round. Now there is the possibility that they could tweak at the bomb buying program in in June. I think that’s that he has or that you way to has increased that risk. Now you know maybe even an interest rate hike, but it’s very difficult to imagine that they could hike interest rates in June without that domestic data strengthening and and and I don’t think we’ve seen that yet.