UK facing Winter Double Whammy
14th September : Highlights
- Sterling struggling with Brexit impasse
- FOMC meeting to provide a solid basis for recovery
- Lagarde sees uneven and uncertain recovery but no increase in PEPP
Johnson determined to prove that his Brexit stance correct
While investors accepted that the Pandemic was a cause for concern in many nations and was therefore an imponderable going forward, the fact that it is the UK that is now seen as the bad guy in Brexit negotiations that set the pound on a course lower last week.
Having fallen through several levels of support, breaking the psychologically important 1.3000 level versus the dollar so easily means that the future is uncertain, to put it mildly.
While no-deal had been an abstract phrase trotted out by those with sufficient bravado but insufficient knowledge of its true effect, now, no-deal has become the most likely outcome.
Prime Minister Boris Johnson continues to insist that he has full control over the negotiations while one of his Ministers, speaking over the weekend, labelled the Bill as insurance for the Government should what has been agreed not work in practice.
This comment displays an unimaginable level of naivety given all that had gone before. Brexit is likely to be a major driver for the pound over the next month or so.
Coronavirus infections continue to rise with the spread being seen in a wider range of age groups and demographics. The rest of the Continent is suffering a similar rise, which brings a total lockdown with its consequent lockdowns into sharper focus.
Last week, the pound suffered from the uncertainty over Brexit and Covid-19, falling to a low of 1.2762 versus the dollar and closing at 1.2795. It was a similar story versus the euro. The pound fell to a low of 1.0762, closing at 1.0801.
Social housing suffering as Congress fails to agree support
A fall in global risk appetite as the second wave of Covid-19 begins to take hold in several industrialized nations has contributed to the dollar’s relative strength but it was the change to the Fed’s treatment of its inflation target which was the catalyst.
It is counter-intuitive to see a change in policy that will mean interest rates will remain lower for longer provide a boost to the currency, but such is Fed. Chairman Jerome Powell’s growing reputation as an innovative and progressive Central Banker, that when he talks, the market listens.
Powell has learned the important difference between providing sufficient advance guidance and being predictable. This week, the FOMC will meet for its monthly meeting. Rates will be left on hold, but in his press conference following the meeting, Powell will reiterate the Fed’s preparedness to act if necessary.
Such is his gravitas that traders will see his caution as watchful rather than complacent. This attitude springs from the market’s belief that the FOMC will act between meetings if necessary as it did twice in the early days of the lockdown.
The single most important factor holding back the dollar is the continued lack of a renewal of support for small business and the unemployed that has been in limbo since the original Bill expired at the end of July.
The politicization of such decisions has been a feature of the Trump Presidency, but even as Trump appears to be trying to climb a greasy pole, it would still be a surprise to many if the election was won by Democrat Candidate Joe Biden.
Last week, the dollar index’s price action was best described as mixed. It traded between 93.66 and 92.69, closing at 93.25. It appears to be building a base around 92.80 but with several significant drivers still in play, traders are unlikely to commit to long positions until there is a clear trend.
Coronavirus infections rising at a higher rate
It is no secret that the biggest issue facing the Eurozone in the long term is the lack of fiscal unity. That is seen as the single issue that will cement the bloc as a genuine global force but such an agreement is being studiously avoided as one of the issues it will go solving way to solving, employment, is becoming the issue that is most affected by the Covid-19 pandemic.
In her press conference following last week’s ECB Governing Council meeting, Lagarde appeared a little contradictory in ruling out any rise in the PEPP (Pandemic Emergency Purchase Programme), yet also warning against complacency.
In order to be seen as a leader in global affairs, rather than a follower, the EU needs to slim down its cumbersome decision-making processes and elect more decisive leaders.
So many decisions are made through political expediency, rather than choosing the best man for the job that the market questions the ability of those in power to deal with genuine crises.
The most recent examples are the appointment of Lagarde, despite the President of the Bundesbank, Jens Weidmann being far better qualified, and Ursula von der Leyen being elected as President of the EU Commission.
Von der Leyen has the one credential that made her the most suitable candidate. She is heavily supported by German Chancellor Angela Merkel.
The influence of Merkel over EU affairs will come to an end next year and the void she will leave will be difficult to fill. Just how that change will manifest itself is still open to question, but it is unlikely to bring more dynamism.
The euro is still unable to mount an effective challenge on the 1.20 level versus the dollar. Last week it reached a high of 1.1917, closing at 1.1846. As it continues to make lower highs, a further drift lower to test support at 1.1780 is possible.
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.”