08 April 2021: Sterling running out of steam

Sterling running out of steam

8th April: Highlights

  • AZ vaccination concern little more than a hiccup
  • Fed on hold………until it isn’t
  • Dutch CB sees every reason for a robust recovery

Business optimism remains strong in the short term

The pound is starting to lack the impetus to challenge the 1.40 level versus the dollar, despite the dollar’s recent correction.

A couple of weeks ago the market had taken on the characteristics that would have been expected from economies that were recovering at different paces, but that has now changed.

The success of the vaccination programme has given more support to the economy than the various support packages delivered by the Chancellor and the Bank of England.

With another stage in the reopening process taking place next week, the short-term prospects for the UK remain sound. Although official bodies are predicting strong growth for the UK well into 2022, there are concerns building that the withdrawal of stimulus and changes to taxation may hit the country’s longer-term prospects.

There are still the twin issues of rises in inflation and unemployment to be faced and the outlook could turn bleak as the country enters the Autumn/Winter period.

The Bank of England could easily face a tough decision over inflation. If the economy falters and jobless numbers begin to rise, there will be further pressure at MPC meetings for a further rate cut to be considered.

The first inkling that this could be a possibility would be an acknowledgement that policy may need to be loosened again, since BoE Governor Bailey has promised significant advance warning to banks of any move towards negative interest rates.

For now, the issues surrounding a rare blood clot attributed to the AZ vaccination have been dealt with, as far as it can be, by the scientists who compared the dangers with crossing the road.

The pound has faltered versus the dollar as well as the euro. Versus the greenback it fell to 1.3724, closing at 1.3738. Against the single currency, it has entered a corrective phase. It fell to a low of 1.1542, closing at 1.1572.

The charts show support around the 1.1520 area and it remains to be seen if the pound musters sufficient buying interest to remain above that level.

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Fed officials at pains to clarify position

As yesterday afternoon wore on and the countdown to the release of the FOMC minutes drew closer, it became fairly clear that what was said at the meeting held three weeks ago no longer fit with what has happened to the economy since.

In order to head off any significant market reaction to bland steady as she goes, comments from regional Fed Presidents Chicago’s Charles Evans and Dallas’ Robert Kaplan were deployed to explain the current position.

They made all the right noises about the Fed’s determination to ensure that any rise in inflation is appropriately dealt with and spoke almost in unison about the reasons that any withdrawal of support by the Central bank would be considered premature.

Kaplan acknowledged the considerable amount of work that needs to be done to retrain the workforce as the economy begins to produce vacancies that will need to be filled, while Evans considered it too soon to be talking about tapering the QE programme.

President Biden also held a press conference last evening at which he talked of the infrastructure investment he announced last week. He spoke of how the programme will be funded by a rise in corporate taxation and pronounced himself willing to talk to The Hill about the most appropriate level at which taxation should be set.

Biden went on to warn that the country needs to be sharper in making policy decisions and acting upon them if it doesn’t want to be overtaken by China which has shown itself to be better at adapting to changes in direction.

The next Fed meeting is in three weeks’ time and the market could be baying for more decisive words if not actions by then, considering the fast-moving changes that are taking place with the country rushing headlong into a complete reopening.

The dollar index recovered a little yesterday. It rose to a high of 92.50, closing at 92.41.

Global recovery to drag Eurozone along in its wake

There is a level of optimism and confidence pervading the Eurozone that the current economic data and lockdowns caused by the third wave of Coronavirus barely warrants.

The various states of the Union appear to be getting their act together with regard to vaccinations, while Brussels has found a way to ensure that supplies are both plentiful and constant.

This has led several national leaders to declare that the current series of lockdowns are likely to be short lived.

Klaas Knot the Head of the Dutch Central Bank made very optimistic noises in a speech yesterday talking of the ability of the ECB to possibly begin tapering its bond purchases in the second half of the year.

This may have been a case of Knott talking his book, as he represents the haves, that are beginning to become impatient with the sight of good money being used to support economies that lack their own financial discipline.

A spokeswoman for the German Government yesterday made a veiled warning that they will not hesitate to continue to use short sharp lockdowns to combat further Coronavirus hotspots.

This was discussed as a tactic at the height of last year’s rising infection rates but was mostly discarded given the upheaval it creates in many sectors of the economy.

While optimism remains, there is a chance that once the current level of infections abates and the vaccination programme is ramped up that an exit from the current recession will be found,

For now, the Eurozone is unlikely to grow as much as other G7 nations outside the Union as it is unlikely to find the impetus that is driving both the UK and U.S.

The euro fell back versus the dollar yesterday despite slightly better expectations for recovery. It fell to a low of 1.1860, closing at 1.1866.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”