GDP expectations driving Sterling
11th February: Highlights
- Bailey accuses the EU of unfair targeting of the UK over financial services
- Inflation concerns doused…. for now
- EU is looking to challenge the dollar’s dominance
UK access to European markets being damaged
Nonetheless a belief is beginning to grow that the UK will be able to completely reopen in the coming months as the country’s vaccination programme outstrips the rest of G7 and the industrialised world.
The concern that the Bank of England would be forced to take official interest rates negative was mostly driven by a fear of the unknown, but that issue is now receding. There is genuine optimism regarding the release of leading indicators while the expectation that Q4 will have seen positive growth is encouraging no matter how small.
A rise of 0.5% QoQ will leave the country still below where it was in terms of output a year ago but provides hope of a greater rise in Q1 together with optimism that growth could be stronger than the market had been expecting over the entirety of 2021.
Andrew Bailey, the Governor of the Bank of England warned yesterday that the EU is determined to keep the UK on a tight leash when negotiations begin about UK access to EU financial markets.
The EU wants the UK to confirm that its regulations won’t stray too far from Brussels’ own regulations while the UK believes it cannot agree to abide by rules that may be added in the future that could conflict with its best interest. Bailey believes the EU is trying to hobble the UK and the standing of London as the world’s premier market and try to promote Paris and Frankfurt as viable alternatives.
Sterling continues on an inexorable path towards the 1.40 level versus the dollar. Yesterday it remained well supported but failed to make much headway as a few sellers began to appear. It hit a high of 1.3866, closing at 1.3833.
Stimulus to change the Feds medium term plans
Fed Chairman Jerome Powell spoke of the Central Banks relaxed attitude towards any transitory rise in inflation, since the belief within the FOMC is that while inflation could rise above the 2% target towards the end of this year or the start of next, it will even out, and average inflation will remain close to the target in the long-term.
The belief that following the cuts in rates and injections of liquidity seen early last year, interest rates would remain low for the foreseeable future hasn’t yet been shattered but blind faith has been replaced by a slightly more pragmatic view of Jerome Powell.
Of course, the Fed like any Central Bank will include a caveat that its actions remain data dependent. However, it also needs to provide a degree of advance guidance as to what it is thinking or considering. This is in order to dampen what can turn into a stampede of speculation that in the end, feeds off itself, and can force the Bank’s hand.
The Fed has turned its head recently towards a goal of seeing full employment.
That in itself has inflationary connotations since the more the unemployment rate falls the more demand will grow. Then, should demand begin to outstrip supply, the result is inflation and an overheating economy.
With little to interrupt this the liberal driven level of support both monetary and fiscal, fully supported by the Treasury Department, the economy while viewed positively by the market, is going to provide the hawks with several sleepless nights in the coming months.
Yesterday, the dollar index fell again. It reached a low of 90.25 but recovered a little to close virtually unchanged on the day at 90.42.
Italian bureaucracy makes Brussels look like simplicity itself
As the Former Greek Prime Minister said, the EU may have desires within its ranks to become a more Federal almost Sovereign nation in its own right, but to shackle the members of the Eurozone to that belief will ultimately prove impossible.
With internal issues growing, exacerbated by the Pandemic, a desire for the euro to replace the dollar as the prime global method of exchange is no more than fantasy.
Even the U.S.’ detractors believe in the dollar, even if it is only their ability to use it as a stick to beat America by, threatening, for example, to price oil in euros.
It was the stated aim of the EU when the ECB came into being that the euro would eventually replace the dollar and there has been a growing degree of what can only be considered jealousy, at the benefits the U.S. accrues by doing very little.
Fed actions resonate globally while the ECB struggles to set policy for 19 very different economies.
Von der Leyen faces further issues over unity with Sweden openly eyeing the way Brexit progresses, Italy about to elect a Prime Minister who knows how to unlock the closed doors of Brussels and changing from a custodian of both the currency and monetary policy, to a major source of concern.
The Spanish Government summed up the mood in the Union perfectly yesterday by commenting that its long-term future is far from bright. The Spanish economy has been hardest hit by the Pandemic and the spiral into recession or even depression is unlikely to be broken any time soon.
The euro is still driven by the dollars gyrations (another source of angst in Frankfurt and Brussels).
Yesterday, it was fairly steady rising to 1.2144 but closed unchanged around its opening level at 1.2119.
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.”