12 July 2021: Putting on a brave face?

Putting on a brave face?

12th July: Highlights

  • Bailey sees several digital changes remaining
  • U.S. standing up to Chinese belligerence
  • Eurozone economy performing above Q1 expectations

Bailey sees online retails as the way forward

During the Pandemic, the UK saw a rise of 10% in online shopping. The previous 10% took seven years!

While that is one of the more obvious statistics you will read about the outcome of Covid-19, the question is, how quickly will the next 10% rise be seen, and how will that change the makeup of one of the most fundamental parts of life.

Meeting for a coffee then a mooch around the shops will be a thing of the past. We have seen that shopping for groceries is now done online by 29% of the population. And it is unlikely that the online juggernaut can be stopped.

The sea change in retail behaviour has already seen in several high street staples. It is likely that the major retail entrepreneurs are already hard at work deciding what their business will look like in 5-7 years.

They will no doubt get it right, as they will certainly decide how our retail habits develop. However, there is a whole class of retail outlet which cannot serve its clients online. The aforementioned coffee shop will suffer, as will many independent food and related outlets.

There is no doubt that change is going to come and how that affects employment, which in turn leads to tax revenues and benefit payments, is possibly as large a conundrum as recovery from Covid, Brexit or any other drama lurking in the shadows could bring,

This week, data for both inflation and employment will be released. First, on Wednesday, inflation data for June will be published. It is likely that headline inflation has continued to rise, reaching 2.2% that is 0.1% up on May.

There is unlikely to be any comment from Andrew Bailey since he has already voiced his views on the pattern of rising inflation.

Then on Thursday, the June employment report will be released. A fall in the claimant count of close to 100k is forecast. That should provide a boost to the pound, although positive employment data may not last long, as the next release will contain the first part of the cut in furlough support.

Last week, Sterling rallied to a high of 1.3908 versus a weaker dollar. It closed at 1.3901. Against the euro, the continued its recent rise, climbing to 1.1716 and seeing its highest close since mid-April.

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U.S. adds 23 Chinese firms to blacklist

The U.S. The Department of Commerce added the names of 23 Chinese businesses to its blacklist last week as it accused them of having military contacts and contribution to human rights violations.

It appears that the gloves are off in the phoney war between the two nations, who are happy to talk to each other about anything as long as it doesn’t upset their shaky equilibrium.

Trade talks scratch the surface of the issues between the two nations, who have allowed their trade to become a one-way street.

Having seen exporting its own manufacturing capability to Asia as a way of cost saving, U.S. Commerce has allowed China to both produce top quality goods at prices which undercut the U.S., who set up in their backyard.

The discussion over tapering of the support for the economy by the Federal Reserve now seems to have begun.

Having given the market a degree of advance guidance by confirming rate rises would likely begin in 2023, the Fed minutes show that discussion of tapering has started and a few FOMC members have already said they would like to see the level of purchases begin to wind down this year.

This week, inflation data will be released and despite being sanguine about the transitory nature of rising prices, there is little doubt that the news will be eagerly anticipated by Jerome Powell.

Headline CPI is likely to have levelled-off a little, falling marginally to 4.9%. Stripped of volatile food and energy prices, the rate is expected to have risen from 3.8% to 4%.

The fact that there is enough data and monetary policy news already in the market, should allow investors to begin to see more clearly how the dollar will react through the rest of the year. The one imponderable is who will win the race to taper. In fact, right now, it is difficult to even decide whether the ECB or BoE will pip the Fed to the post?

One thing is certain, it won’t be the BoJ, who have already confirmed that they will only begin the debate in 2023.

Last week, the dollar index fell away towards the end of the week. It reached a low of 92.00, closing at 92.10. It tried a couple of times to test resistance at 92.80, but ultimately was unable to summon sufficient momentum.

GDP exceeding forecasts seen in Q1

The relaxation of Covid restrictions is beginning to have the desired effect on activity and growth. In fact, the pace at which the vaccination programme has grown has exceeded even the forecasts of the ECB. While expectations for the economy were no doubt optimistic, they have been exceeded.

The Q1 contraction in GDP turned out to less than had been feared, and expectations for growth across the whole of 2021 are now close to 4.5%, with a 5% increase forecast to 2022.

Last week, the grand unveil took place following the ECB’s much-heralded Strategic Review.

It turned out to be something of a victory for the doves as the ECB gave itself a little more wiggle room when it comes to inflation the ECB has always been viewed as hawkish with inflation targeting a ceiling of close to but not exceeding 2%.

Under the new strategy, inflation will be considered symmetrical; that is to say that anything below 2% will be equally undesirable.

A sustained period of inflation in excess of 2% will be tolerated should economic conditions create a situation where interest rates need to stay at or close to zero.

Two Germans with strong views on monetary policy and inflation were among the first to comment.

ECB Executive Board Member Isabel Schnabel remains convinced that inflation is unlikely to be excessively high, while her colleague at the ECB and Bundesbank President Jens Weidmann, appeared concerned that symmetry means that the ECB will be able to make up for previous low inflation periods by allowing it to rise now.

Now a new definition for inflation has been found. The ECB Board can turn its attention to tapering its bond purchases and, apparently, the conversation has already begun.

Last week, the euro reacted to a weaker dollar by rising to a high of 1.1895, closing at 1.1874.

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.”