dealtn wrote:GEMMs, despite your claim, do not have the obligation to make markets and liquidity in all market conditions
Firms endorsed by the DMO as GEMMs agree to meet a number of obligations on a continuous basis. The obligations are as follows:
A. Participation in primary issuance
1. GEMMs are expected to play an active role in the issuance, distribution and marketing of UK government debt.
2. GEMMs should aim to purchase at least 2.0% of issuance by sector – conventional and index-linked - on a 6-month rolling average basis.
3. GEMMs are expected to participate in every operation for which they are a designated market maker.
B. Market making
1. GEMMs are committed to make, on demand and in all conditions, continuous and effective two-way prices to their customers, in all gilts in which they are recognised as a market maker.
2. GEMMs must aim to achieve and maintain an individual secondary market share of at least 2.0% on a 6-month rolling average basis, in the sectors for which they are a designated market maker.
You need to read 3.1 Secondary Market Dealing, and in particular 96 and 97.
We can argue what "obligation" means in theory if you like. In practice GEMMs can and do meet that "obligation" by effectively declining to quote. All the GEMMs counterparties know what that means, which is our price will not be the most competitive, but you can have a price if you really need one.
All of which isn't particularly useful in this context, but if you wish, it means that market prices can change. Your argument appears to be that the FX market doesn't have market makers, which means prices are less continuous, and could move more in that volatility. In fact I am being generous to your argument, as my belief is that liquidity is greater, prices are more continuous, and less volatile in FX.
You can have whichever version of the truth you like though. We are agreeing that the relative price of £ against other currencies moves (as is clearly demonstrated by any kind of historical, or graphical representation of those relative prices).
So given we agree, and we are only at variance over the quantum of such moves, we should be able to agree that the prices of imports to a UK consumer are dependent on the FX rate, and changes in the FX rate will affect the price of those consumer goods. The measurement of those prices is the inflation basket, and changes to them the inflation rate.
So are you now prepared to agree that in an open economy where FX prices are not static, that changes in those exchange rates translate into changes in the consumer price, and inflation rate?
It seems very odd you can't take this small step from your own description of how markets work.