I’ve just gone through the BOE minutes and there’s a couple of interesting points to pick out. I’ve mentioned sentiment and optimism as a part of understanding fundamentals previously (Jim’s just touched on it too) and part of the minutes confirm this also.

The recovery has been largely built on household spending however this has not come on the back of an increase in wages but with people dipping into and reducing savings. The savings ratio has dropped from 8% to 5% of income. This has come on the back of increased optimism over future incomes and reduced uncertainty leading to a reduction in precautionary savings among other reasons. It’s a point that the BOE note in the minutes and should add to the caution we’ve been warning about on ForexLive.

Consequently, maintaining the recent rates of consumption growth would require a sustained pickup in real income growth, preferably underpinned by stronger productivity growth.

…Weak pay growth also pointed to the continued existence of slack in the labour market…

… this suggested that there could be more downward
pressure on pay growth for any given rate of unemployment…

Wages! Wages! Wages! Optimism will only get you so far until you need to see some money appearing from it.

We could come to a time where consumption plateaus and I would think we’re not far off that point given how far we’ve come so far. The BOE also cite the importance of business spending again.

The continued recovery was also likely to require a more sustained expansion in corporate spending

The BOE are spot on and I’m comforted that they are pretty much on the ball. The rest, unfortunately, falls onto the politicians and even so it’s been moderately “so far so good” from those in charge. Much much more needs to be done by them and they need to make further moves to get wages increasing.

Much like the cable chart earlier, with the 3 steps up in price, the UK is at the top of its first step (2013). This year could be the next step up or a stumble back a few paces. The three main themes we need to see continuing and improving are;

  1. Wage growth
  2. Business investment
  3. Export and overseas sales improvement

(Of course further work is still needed on debt and spending levels.)

Nail that and the bunting will be out once more and the pound will be hard to knock whatever happens in the US and elsewhere.