10 June 2021: Relaxation of restrictions still unclear

Relaxation of restrictions still unclear

10th June: Highlights

  • Haldane sees reopening as another leg-up for economy
  • Further infrastructure investment necessary
  • Will U.S. CPI drive the euro more than the ECB?

Haldane sees political decision as a massive incentive

The interconnectedness of global affairs has been laid bare by the UK’s row with Brussels over goods moving through Northern Ireland, as it may now have a bearing on London’s ability to agree a trade deal with Washington.

The media has picked up on the irony of the EU’s policy banning the import of meat products, which means that the mainland UK cannot sell sausages in Northern Ireland.

Boris Johnson has adopted his usual style of negotiation with Brussels by simply ignoring the issue, commenting that there is a deal to be done.

Brussels’ Trade Minister, who was in London yesterday, used strong language about the deal that has already been done, and called upon the UK to honour its commitments.

President Biden who arrived in the UK last evening to attend this weekend’s G7 meeting indicated that any row which affects the Good Friday Agreement could have consequences for the UK’s ability to agree a free trade deal with the U.S.

One thing is clear: there will be no simple handshake to agree to any negotiation given the degree of antipathy that exists between London and Brussels.

The EU appears to want to punish the UK for leaving the Union, while London feels inclined to enjoy upsetting the overwhelming bureaucracy of the EU.

Bank of England Chief Economist Andrew Haldane is spending his last few weeks in the role bigging up the UK’s recovery from the Pandemic.

Yesterday he labelled the withdrawal of restrictions still scheduled for June 21st a political decision which if it happens will provide an enormous boost both to the economy and to the country’s national psyche.

He went on to say that the lifting of the restrictions will be fantastic for the economy and mean that levels of growth in the UK won’t be seen in any other developed nation. That would remain to be seen given the pace of the recovery in the U.S. but there is no doubt that it illustrates further the pressure on Boris Johnson to make the correct choice.

Unfortunately for the Prime Minister, in this there is no right decision and no wrong decision, since, as it seems to be with every major decision, opinion is split close to 50/50.

Sterling continues to wait in the wings for a decision to be made. If the currency is used as a gauge of opinion, how it reacts once the decision to reopen, or delay is made will provide some clue.

Yesterday, the pound lost a little ground against the dollar but remained within its well-trod range. It fell to a low of 1.4110, closing at 1.4120.

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Market may drive the Fed into action

The FOMC is in danger of being either ignored by the financial markets or forced into a decision it is not yet ready to make.

Inflation data for the U.S. will be released later today and the headline is expected to get very close to 3.5%.

Traders are becoming more anxious about Jerome Powell’s continued use of the term transitory for the period that inflation will remain well above the Central Bank’s target.

The last time inflation reached this level was almost ten years ago. Investors have become used to not having to worry about rising prices or the effect of supply and demand. The FX market seems bewildered by the FOMC’s failure, not only to act, but to show any consequent degree of concern.

It is hard to imagine a more disruptive or destructive four-year Presidency than that of Donald Trump. Just about every area of the U.S., other than perhaps the stock market, has seen a negative effect.

63% of middle level executives across the country see crumbling infrastructure as the second most significant issue facing the country.

The first is on the way to being eradicated, leaving President Biden to negotiate with Republicans over the amount of investment that will be needed to drive the economy forward once the Pandemic is no longer a major issue.

Biden will be taking the weekend off from dealing with domestic issues to headline the country’s return from the wilderness of Trump’s isolationist policies to take its place as the Leader of the Free World, whatever that means today.

Both the Fed and Treasury support Biden’s plans for the country to borrow its way back to strength, with the country set to take full advantage again of the dollar’s unique position.

Yesterday, the dollar index rallied a little but continues to face difficulties breaching several layers of resistance.

It rose to a high of 90.16 but closed virtually unchanged from the previous close at 90.13.

ECB outlook to be far brighter but may drive early hike

The main outcome of today’s ECB rate seeing meeting is almost a foregone conclusion.

There are two items that Christine Lagarde may mention, both of which could have a significant future effect but will cause a reaction today.

The first is any signal that the Bank is readying itself to adjust the amount of bonds it is prepared to purchase on a monthly basis. That is currently set at EUR 80 billion. Any change would signal the beginning of the tapering of support.

The other, as mentioned recently, would be any upward amendment to the forecast for inflation, in particular 2023.

For now, other than at the Bundesbank, there is a degree of acceptance if not support for rising inflation given the support that has been provided by the ECB and the rising levels of debt.

If Lagarde manages to avoid any mention of tapering, traders are likely to show their disappointment by driving the euro lower. It is not likely to be a game-changing move, but the single currency will likely move to the bottom of its recent range, possibly preparing for a breakout should any further negativity emerge from the G7 conference.

The most common belief amongst traders is that the medium-term direction for the euro is skewed to the upside. This is almost an indication that the ECB may announce a change to policy prior to the Fed.

This harks back to yesterday’s comment that despite being in vastly different stages of their recoveries, the ECB will have a far more hawkish attitude to rising inflation.

That is what gives the inflation section of today’s economic forecasts teeth.

The euro looks to have a fairly solid base, but the hesitancy of investors to get ahead of any significant move means that it may not take much of a concerted effort to see the currency break down through its major support around 1.2060.

Yesterday, it rose to a high of 1.2218, but fell back to close at 1.2180. As ranges narrow, pent-up volatility continues to be a concern.

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.”