14 February 2020: Ruthless Johnson takes charge

Ruthless Johnson takes charge

14th February: Highlights

  • New Chancellor set an expansive budget
  • Sharp rise in Coronavirus cases hits risk appetite, drives dollar higher
  • Growth fears hit euro

Chancellors resignation likely to mean expansive budget

Just when the UK has a Government that is well positioned to drive forward with its plans for expansion, the human element returns and controversy dog’s progress.

It is a little early to claim that the Government is in disarray as was suggested by a senior member of the opposition (who can rightfully claim to be an expert on disarray). However, the smooth transition from last year’s political mayhem to a business-like Government putting the country back together after the recent splits has undoubtedly been damaged.

Prime Minister Boris Johnson wielded the knife and sacked several ministers yesterday and Chancellor Sajid Javid’s resignation has seen him replaced by a junior yet up-and -coming Minister in Rishi Sunak. It was believed that Javid was a safe pair of hands as Finance Minister, but was considered a little too conservative (small c) and it is likely that Sunak’s budget in a month’s time is now likely to be far more expansive. Johnson and his senior Advisor Dominic Cummings will be far more heavily involved that would have been the case under Javid.

Putting the personnel changes aside, the financial market was impressed that the Government will probably increase public spending and the pound reacted positively.

It rose to a high of 1.3070, closing at 1.3048 as the elusive 1.30 barrier was breached conclusively..

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Longer term prospects for U.S. continue to improve

The long-term prospects for the U.S. are improving both in comparative as well as absolute terms.

As several nations and regions face economic concerns, the U.S. finds itself on a steady course of higher than average growth and relative stability.

This is far more attributable to a Federal reserve which has found itself on a path that appeals to the financial markets than President Trump’s tax cutting supposedly business-friendly methods. In fact, the only cloud on the horizon is the size of the burgeoning budget deficit which is growing almost exponentially.

In the short term, the effect of the Coronavirus epidemic is the great imponderable, but there is a degree of confidence that the Fed can deal with any significant hit to growth.

Yesterday, inflation data was released with the headline YoY figure unchanged from last month at 2.3%. If this continues at this level or starts to creep higher it may attract the Fed’s attention and lead to higher short-term rates, but for now the economic ship seems to be on the right course.

Any fears of a recession in the long-term have receded almost totally and the view of analysts that the mid-cycle bumps in the road have been successfully negotiated.

The U.S. has not seen a single quarter of negative growth for 11 years, which is a record, but things can change quickly if a global crisis emerges or an event like the LTCM crisis of the later 1990’s happens.

The (extremely) shallow correction seen last week has faded in traders’ minds and there is a hunger for the dollar not seen for some time. Yesterday, the greenback rose to a high of 99.11 which is where it closed. Technically, the dollar is becoming a little stretched and this may cause a further, minor correction but overall, especially given the issues facing the single currency (see below), the dollar’s path could be towards the 100 level.

Today’s data could signal a recession

Traders will be holding their breath this morning as the Eurozone releases data for Q4 GDP. While most analysts and forecasters see growth in both the Eurozone and its biggest economy, Germany, there are significant concerns of a contraction.

Such a nightmare scenario could easily be the prelude to a technical recession given the data that has so far been released for January.

The median expectation is for growth of 0.1% in Germany, unchanged from Q3 and a similar increase for the Eurozone. This will lead to 0.2% year on year growth in Germany and 1% year on year for the entire region.

1% growth in the eurozone will be unchanged from the Q3 year on year figure, while Germany will have fallen from a previous figure of 1%.

Concerns over a recession in the Eurozone have grown considerably since recent data showed that expectations that the green shoots of a recovery were growing, were premature in the extreme.

Retail sales’ biggest fall in a decade and the unexpectedly poor industrial output data has created a pall of gloom over the region that until very recently was showing an optimistic expectation.

The predictions for German growth have been slashed with French Bank Société Générale predicting a 0.3% contraction. Were that to become reality, the single currency’s recent fall would accelerate with long term supports under threat, with calls for parity with dollar becoming more credible.

Yesterday, the euro fell to a low of 1.0834, closing at 1.0841.

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.”