14 October 2020: Johnson feeling the heat

Johnson feeling the heat

14th October: Highlights

  • Bailey provides a sense of realism
  • Inflation on the turn?
  • Hard to be optimistic over recovery

Halfway House regulations an economic decision?

The new lockdown regulations announced by the Prime Minister have been criticized from just about every corner as the balance between protecting the population while defending the economy has seemingly failed to be met.

With infections, hospital admissions and fatalities all rising exponentially, the placing of just one area of the country in the new tier three is difficult to understand. Opposition Parties appear to have evidence that the scientific evidence and advice has been largely ignored.

Andrew Bailey, the Governor of the Bank of England injected a degree of realism into the debate about the Country’s future economic prospects by confirming that the idea of a V-shaped recovery no longer exists. Bailey went on to say that he didn’t feel the time is yet right to introduce negative interest rates.

He said that the market is witnessing a downturn in social activity and spending which contributes to an economy that is performing at a level around 10% lower than it was a year ago.

Following Chancellor Rishi Sunaks unveiling of his latest set of proposals to support workers he is in danger of coming up short. One of the most significant factors affecting the economy going forward that is interlinked with local lockdowns is that only businesses in Tier Three areas will be able to claim support.

This has led to a cynical question about why only Liverpool City is in Tier three since this appears to be an incredibly reactive stance to take when it is fairly clear that other areas are catching up with Liverpool very quickly.

Sunak’s job has been made harder as core unemployment continues to rise. In September the rate of unemployment rose to 4.5% from 4.3% in Auguist.

The Government is still heavily involved in Brexit negotiations and the October 15th deadline is rapidly approaching. There has been no official line concerning what the Government’s intentions are, only a vague rumour of disappointment from EU Chief Negotiator Michel Barnier that progress made so far has been insufficient to reach agreement.

The pound has, yet again, been unable to cling on to gains above the 1.30 level versus the dollar. It slipped to a low of 1.2921, closing at 1.2934.

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Biden victory would see far greater stimulus bill

Data released yesterday showed that inflation is gradually rising across the U.S. Rather ironically, the most significant contributor to the rise in prices in September was used vehicles, which saw the biggest yearly increase in more than fifty years.

Core inflation remained at 1.7% in September, not a million miles from the Fed’s 2% target. Should the economy start to perform at above expectation again once the relief package has been agreed, it could be above the 2% threshold fairly soon.

Advance guidance from Fed Chairman Jerome Powell has already warned the market that monetary policy won’t be used to dampen prices since low rates are the lifeblood of continued growth.

Meanwhile, the Presidential Circus rolls on. President Trump was in Florida on Monday night, preaching to the converted, but the biggest question in one of the major Swing States, is how many didn’t attend the rally and how will they vote.

Trump has instructed his re-election team to arrange a rally every day until November 2nd since being seen out and among his supporters is, he believes, his biggest chance of upsetting what the polls are saying.

Should Trump be defeated, there is growing concern that the cork will be out of the support bottle and the funding that will be provided to those affected by Covid-19 will be astronomical. This could leave the economy extremely vulnerable should higher rates be expected by buyers of Government debt.

Just when the dollar index looks set to test a significant level of support, it turns around and exhibits a degree of strength. This happened again yesterday, with traders half-expecting a test of the 92.80 support, it rallied to a high of 93.59, closing at 93.55.

ECB Still not certain to add more stimulus

Evidence that the Eurozone economy is beginning to slow is growing with yesterday’s ZEW index of economic sentiment collapsing across Europe as a whole. In Germany sentiment also fell but not by such a significant amount as in the rest of the region.

Germany has been an almost mirror image of the rest of the Eurozone recently but could be beginning to be dragged lower as its domestic markets are contracting rapidly.

The recent relative strength of the euro also appears to be faltering. Over the past few months, the euro has been reactive to the activity of the dollar index, but it appears to be breaking ties or becoming a more dominant influence.

Comments made by ECB Governing Council members appear to reveal differences of opinion. Dutch Central Bank Head Klaas Knot commented yesterday that activity is definitely slowing but he doesn’t see the second wave being as dramatic as the first.

He went on to say that it is too early to say if the ECB’s support measures will need to be extended. The Netherlands are one of the frugal five, so Klass’s comments would be expected to be hawkish on further support.

EU Brexit Negotiator Michel Barnier doesn’t seem to believe that Boris Johnson will pull the plug on negotiations despite his line in the sand. He commented last evening that the EU will continue to search for a fair deal the coming days and weeks.

Coinciding with Johnson’s ultimatum is the EU Summit that will take place in Brussels this Thursday and Friday. It is expected that along with Brexit, better coordination of efforts to fight the spread of the second wave of Coronavirus will be discussed.

The euro which has been struggling to establish a foothold above 1.18 versus the dollar succumbed to downwards pressure yesterday. It fell to a low of 1.1730, closing at 1.1748.

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.”