13 October 2020: Three Tiers for the Prime Minister

Three Tiers for the Prime Minister

13th October: Highlights

  • Johnson’s lockdown measures may not suffice
  • Pence credits Trump with jobs miracle
  • ECB Chief Economist predicts tough times ahead

New local lockdown measures add to Coronavirus confusion

The UK Prime Minister Boris Johnson unveiled a new three-tiered system of local regulations yesterday, designed to stop the spread of the second wave of Coronavirus.

There has been severe criticism of the Government since the Summer over the regulations that have been brought in, with the public saying they are too complicated. The new system has a number of sub-tiers designed to allow local authorities the flexibility to introduce their own restrictions.

Both in Parliament yesterday afternoon and on TV last evening, Johnson was flanked by the Chancellor, Rishi Sunak as the economic effect and the Government’s provision of 66% of the wages of those workers affected came under fire.

Despite the growth of the virus with more people in hospital than there were on March 23rd when the first lockdown was first introduced, only one area, Liverpool City, has suffered the most severe restrictions.

Rishi Sunak’s input to the announcements made yesterday was clearly to emphasise his mantra that not every job can be saved, as he struggled to defend the latest relief effort.

The balancing act between protecting the economy and keeping the country safe is almost impossible to achieve and following the plaudits he received with during the first furlough, Sunak is seeing the other side of ministerial life facing significant criticism from the hospitality sector, some of which has been unable to reopen since March, while pubs and restaurants are likely to start having to close again.

The pound reacted favourably to the new restrictions although analysts are still concerned over the future should the move from tier two to tier three spread. It is impossible to say whether a country-wide lockdown is becoming inevitable, but if it does Sunak’s ability to deliver will be sorely tested.

The pound reached a high of 1.3082 yesterday, closing at 1.3064. As Brexit talks conclude it may struggle to add to its gains this week.

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Dollar struggling to make ground as euro and pound gain

Vice-President Mike Pence is nothing if not a loyal lieutenant to his General, President Trump.

Speaking at a rally at the weekend, he attributed the addition of close to twelve million jobs since the pandemic took hold to the President personally.

While his influence may stretch far and wide it is unlikely that even a self-aggrandizing President like Trump would take all the credit.

The Administration is stepping up its re-election rhetoric with White House Economic Advisor Larry Kudlow also heaping praise upon Trump’s achievements in office.

As the election approaches, Trump’s opponent Joe Biden has fairly obviously stepped back a little to allow Trump to make his own mistakes. It is still unclear whether the next Presidential debate, scheduled for this Thursday, will take place as Trump has refused to take part if it is to be held virtually.

He has fairly typically used entirely spurious concerns that his microphone could be turned off for his reticence.

There has been some movement towards a solution to the stalemate over a Bill to provide Federal Support to those most affected by the pandemic, with the two sides apparently coming closer to agreeing a figure.

This week will see the release of retail sales data for September. There are fears that when the numbers are released, they will show a very small increase as the effect of people’s concerns over their jobs and future income leads to a slowdown in spending.

The dollar index remains under pressure as its two main constituents make small but steady progress. Yesterday it fell to a low of 93.01, closing at 93.04. It looks unlikely that it will be able to stage much of a rally as the proximity of the election keeps it on the backfoot.

ECB likely to be aggressive but not over inflation

There has been a significant increase in the number of members of the ECB Governing Council, mostly Central Bank Heads in their own right, speaking publicly about their fears for the economy, as concerns spread that there are potential splits in its ability to provide monetary support to those members of the Eurozone most affected by the pandemic.

Cases of the virus are spreading more quickly than in the first wave with 100k daily cases being reported for the first time this week.

One of the more prominent speeches has been made by Chief Economist Phillip Lane. Lane was the Governor of the Bank of Ireland until taking up the post in Brussels. He took up the role as Central Bank Head in 2015 in the aftermath of the near collapse of the country from the financial crisis.

Lane voiced a concern that the second wave of the virus has the potential to be more devastating than the first but insisted that the ECB will be as aggressive as the Fed has been in supporting the economy. The glaring difference between the Fed and the ECB, however, is that the ECB has nowhere near the tools or the ammunition to make as big an impression on the issue as the Fed.

One area of difference will be that the ECB will remain tough on inflation despite its efforts to provide support. Lane confirmed that it will not switch to an average inflation target as the Fed has done since allowing inflation to rise without taking control early on could see it rise to such an extent that it could become impossible to control without significant action.

This is despite a continued commitment to negative rates and the current deflation being seen in the region overall.

The well-respected ZEW survey will be released later this morning and is expected to fall back, in line with slowing activity. This could see the euro lose upwards momentum.

Yesterday it was unable to improve on the previous day’s close, falling back to a low of 1.1786 before closing at 1.1812.

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.”