11 March 2020: Fragile gains wiped away

Fragile gains wiped away

11th March: Highlights

  • Sterling corrects as dollar rallies
  • Rumours of spending package to halt virus downturn supports greenback
  • Will Italy become the next Greece, or will the EU Commission see sense?

Budget to unveil virus buster spending plans?

Today sees the first budget of a UK Government with a comfortable majority for some time. Since the Brexit referendum almost four years ago both Theresa May and latterly Boris Johnson have been under the pressure of a slim majority or being a minority Government.

Now Johnson and his new Chancellor Rishi Sunak have the luxury of being able to produce the budget they want to fulfil the commitments made in their election manifesto, safe in the knowledge that any disagreements from opposition benches in Parliament will be verbal and no more.

The one fly in the ointment is, of course, Coronavirus and the potential it has for wrecking the Government’s plans and sending the economy close to, if not actually into, a recession.

Should the epidemic grow to Italian proportions (see below), there is a real possibility that growth will turn negative. Air travel is already devastated with both mainstream and budget airlines slashing schedules. Tourism is being devastated; the hospitality industry is potentially next with a knock-on effect almost certain.

Sunak is expected to present an expansionary budget with several additional items particularly designed to ward off the worst effects of Coronavirus. Infrastructure projects, particularly in the north of the country will be introduced but there will almost certainly be a delay in their implementation. Social care will also receive new funding given the promises made during the election campaign.

In normal times, this would be the day when the Government begins its quest to reunite the country following the divisions caused by Brexit. While the budget will illustrate good intentions, it will be delivered with yet another crisis set to engulf the nation.

The pound corrected its recent rise yesterday, but again, it was due to the dollars’ price action. It fell to a low of 1.2871, closing at 1.2905. Recent volatility is unlikely to settle down in the coming days/weeks as the radically unknown effect of Coronavirus remains.

Considering your next transfer? Log in to compare live quotes today.

Dollar mixed as he says stay calm it will go away

The dollar rallied significantly from its recent lows as expectations grew that a press conference called by President Trump would deliver a fiscal stimulus package to aid an economy which is likely to be severely curtailed by Coronavirus.

When Trump finally announced measures, they were strong on rhetoric and flimsy on practicality.

Trump advised Americans to stay calm and Coronavirus will go away. With election rallies being cancelled and containment zones being set up in areas with significant clusters of new cases, Trump was criticized for concentrating on the economy going forward and not reacting to the immediate crisis.

Trump’s plans to offer tax relief as his most significant measure were criticized for that very reason and was countered by a series of more socially acceptable measures being worked on by the Democrat majority in the Senate.

Trump countered these proposals as being riddled with items that have nothing to do with the crisis but are proposals made by Democrats that have been voted down in the past.

With everything being centred on the election campaign, House Majority Leader Nancy Pelosi will meet Treasury Secretary Steve Mnuchin later today to discuss a Bipartisan response.

As his Chief of Staff tested positively for the virus Trump tried to calm markets without worrying too much about those directly affected by the outbreak. Predictions remain that the U.S. will be as severely affected as Italy within two weeks. The President commented that he believes that the outbreak will be contained and pointed to the slowing rate of infections being seen in China which is ground zero for the outbreak.

The dollar index rallied on the hopes for a series of actions to combat the virus, but the market remains sceptical. It rallied to a high of 96.61, closing at 96.56. However, overnight it has given back a significant portion of those gains. So far (056.30GMT) it has reached a low of 95.97.

What can Brussels or the ECB provide as Italy teeters?

With actions being announced and significant steps undertaken to contain the Coronavirus outbreak, the Eurozone and wider EU appear to be lagging in its ability to react.

As has been seen before the response appears fragmented with an every man for himself attitude with no Federal or orchestrated response.

France and Germany the two most affected countries after Italy have belatedly woken up to the spread of the virus and its constituent issues.

It seems that a reticence to allow spending to be increased by abandoning the strictures of the growth and stability pact is the very least that can be done to come to Italy’s aid. The call to arms speech made by the French Finance Minister a couple of days ago appears to have been the only significant official response.

The EU Commission has been ominously quiet during the outbreak and it spread with new President Ursula von der Leyen appearing like a rabbit caught in the headlights.

As and when the crisis abates, there will be serious questions needing to be asked about the ability of the region to respond as one.

Meanwhile, Italy is on complete lockdown as travel into and out of the country is prohibited. The country is being used as a blueprint for the spread of the virus but unfortunately, it failed to respond sufficiently quickly when cases first emerged in the north of the country in late January. While it is not a case of shutting the door after the horse has bolted, Italy now faces a near impossible task of containment until cases start to slow naturally.

The Italian economy is going to be decimated with tourism at a virtual standstill as emergency measures take hold. The Italian Government is toothless in its ability to provide enough support for its population and three is bound to be a right-wing backlash against Brussels once things start to ease and the spread of new cases abates.

Yesterday, the euro reacted to the rise in the dollar index, falling to a low of 1.1275 and erasing all its gains from the previous day.

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.”