10 August 2021: Hybrid working dulls relationships

Hybrid working dulls relationships

10th August: Highlights

  • Inflation and low rates a double whammy for savers
  • Job openings data reflects supply issues
  • ECB Moving fast but going nowhere

Civil service demands workers return or face salary cut

Chancellor of the Exchequer Rishi Sunak has suddenly burst back into the political limelight after a few months trying to address the imbalance in the country’s accounts.

Fresh from having upset his boss by writing him a letter demanding a change in Government policy on travel restrictions, he has waded into the debate regarding working from home

It is becoming more prevalent that civil servants are returning to their desks, a move supported by Sunak who believes that the contacts he made in his early years would have been impossible without face-to-face contact.

There is of course an opposite view that a cult of personality is more difficult to build through Zoom or Teams. This is a debate that will run and run through the service sector as the pros and cons are weighed up from both sides.

While support for the wider economy has been and remains vital to the recovery from the Pandemic, those saving towards their retirement are suffering long-term concerns.

The worst-case scenario for those putting funds away in cash in order to be risk averse are lower interest rates coupled with rising inflation. Carefully considered calculations are being shattered by the current view that inflation may rise to 4% later this year. This could add years to the average person’s working life.

The consolidation of the pound recently below the 1.40 level versus the dollar could mean that while remaining stronger versus other currencies where Central Banks remain dovish, the pound could be at the beginning of a long journey lower which sets a trend for the rest of the year.

The target for such a move would be long-term support at 1.3580 but any move through 1.40 would negate such a possibility. However, with U.S. data still pointing towards a tightening of monetary policy by the Fed in the Autumn, it is a more than plausible theory.

Yesterday, the pound fell to a low of 1.3840, closing at 1.3849.

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Fed members willing to talk up taper

While congress agonizes over a further stimulus package proposed by the administration, over at the Fed, officials are happy to talk about a tightening of monetary policy.

It seems that the Senate is well on the way to approving a Bipartisan infrastructure bill valued at a little over one trillion dollars. This is a relatively small addition to the Bills that have been passed in the past few months.

However, the difference this time is that it is not aimed at the recovery of the economy, more the work that needs to be undertaken to improve inner cities and transport links. It seems there is a major move beginning towards making road transportation more streamlined, with certain freeways being decommissioned and others upgraded.

It will be work carried out in inner cities like Baltimore and Cleveland that fulfils election promises that made a significant contribution to Biden’s victory.

The progress that has been made over the past few days means that the Senate is likely to vote later today, and the Bill will move on to be debated in the House of Representatives.

The expected tightening on monetary policy by the withdrawal of asset purchases that will shrink the size of the Federal Reserve’s balance sheet is now almost certain to commence in October.

That will mean that along with the UK, which will probably start tightening a little after the Fed, that a divergence of policies will have begun.

The concern remains that the U.S. is not yet on top of the Delta Variant, with hospitals in Florida desperately searching out beds for those who are suffering the worst.

Treasury Secretary Janet Yellen has called for common sense to prevail in the raising of the debt ceiling. She said that the increase in Government spending was to pay for already agreed expenditures, and failure to raise the limit would bring irreparable damage to the economy and U.S. citizens.

The dollar didn’t react to Yellen’s words, since it would be a shock if she said something else.

The dollar index continued to rally, instituted by Friday’s data, it rose to a high of 92.95, closing at that level.

Weidmann continues to drive an alternative view.

Bundesbank President Jens Weidmann said nothing new in calling for a tightening of monetary policy in a recent magazine article.

However, the fact that he is continuing to drag up an issue that has already been voted upon by the Central Bank’s Governing Council must be a source of immense frustration to Christine Lagarde.

Having been passed over for a role for which he was supposed to be a shoo-in makes his approach feel personal, but with a big year coming up for German politics in 2022, it could presage the Union’s largest and most powerful economy flexing its muscles.

There is little doubt that there is a consensus dividing dilemma within the Central Bank. There was close to unanimous acceptance of the theory of a symmetrical approach to inflation, but how it is going to be achieved and the immediate and literal implementation have driven a wedge through the Bank.

Countries are now looking to their own economies as there is a growing divergence in their performance.

France announced yesterday that its economy remains around 1.5% below its pre-Pandemic level.

Given the shock that France delivered earlier in the year when it announced a record budget deficit, the fact that both manufacturing and services output are stable and growing moderately is about as much as the French Public can expect.

As French voters gear up for next year’s presidential election, markets will start to assess whether they are in a forgiving mood given the tribulations Emmanuel Macron has faced or are they going to act in a not unusual way and throw the baby out with the bathwater, performing a lurch to the right voting in Marine Le Pen.

Were Le Pen to be elected, the entire Union could see an extended period of uncertainty, as Brussels would have to make a far greater effort to keep France onside to avoid a potentially catastrophic Frexit.

Yesterday, the euro fell to a low of 1.1737, closing at 1.1739.A test of the year’s low at 1.1704 now appears to be a certainty.

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.”