GDP grew by 0.4% in February
15th April: Highlights
- UK economy got a February head start from Roadmap
- Powell sees economy at an inflection point
- PEPP to end next March at the earliest
Johnson’s roadmap allowed businesses to prepare
Inflation has hardly been an issue for the global economy for a generation and despite the concerns voiced by investors, Central Banks continue to adopt a sanguine attitude expecting the market to trust their judgement.
As well as common issues, each economy will face unique demands that will need to be managed both effectively and efficiently.
In the UK, the issues around Brexit have not been dealt with and could come back. So far, data shows that following a near collapse of trade in January due to the confusion brought about by the change in documentation business has begun to recover.
The situation in Ireland illustrates the uneasy peace that remains in place with mistrust on both sides. The Good Friday Agreement was both historic and expedient as it allowed both sides to step back with dignity.
The roadmap that Boris Johnson presented to the country providing details of a staged easing of lockdown allowed businesses to begin to prepare for a series of removals of restrictions.
This, coupled with the rollout of the vaccination programme, saw the economy begin to emerge sooner than had been anticipated. In January, in spite of the issues due to Brexit the contraction in GDP was less than had been expected.
The economy shrank by 2.2%, substantially less than the 2.9% originally projected, while in February it grew by 0.4% over January.
The unique issues faced by the major economies will spill over into currency trading.
Currently the pound is in something of a state of flux.
Traders believe that the success of the vaccination programme will provide the UK with a head start, but looming concerns over unemployment together with uncertainty over the path of infections once the economy reopens fully will temper any advance.
Yesterday, Sterling claimed against the dollar to a high of 1.3808, It gradually settled back to closer at 1.3777.
Taper will precede rate hike to provide guidance
This attempt to reassure the market that the current level of support will remain in place until the recovery is both solid and reliable was welcomed by financial markets.
However, there is beginning to be something of a groundswell of demands to be informed just what the Fed intends to do to remain in control of what could easily become a runaway train.
As already mentioned, there is little experience of markets being affected by inflation and the need for interest rates to be used to curb price increases.
Powell is in effect asking markets to trust him and while at no time in his tenure has he given any reason to doubt him, he does not possess the aura of a Greenspan or the dynamism of a Bernanke.
Powell surprised markets by saying that he wants inflation to rise above 2%. It is unusual for a Central Bank Head to encourage inflation and that will make investors nervous.
Powell referenced advanced guidance of any rise in rates by commenting that any tapering of support through bond purchases will take place well in advance of a hike in interest rates.
Powell is demanding a giant leap of faith from the market to allow him to play with fire. He talks a good game, but now the time is approaching for him to put words into action.
Powell went on to say that the biggest risk to the recovery and job creation is a rise in infection rates. While he appreciates that the economy has to reopen, he will remain cautious until the whole world is vaccinated.
The dollar index continues to fall through support levels. Yesterday it continued its recent downtrend falling to a low of 91.57 and closing at 97.65.
The 91.40 level should provide a degree of support but in the current environment that is by no means certain.
Central Bank prepared to adjust all instruments
It has pronounced itself ready to deal with the economic effects of the Pandemic for over a year now and confirmed that it has the tools to deal with a downturn.
It seems that the Central Bank’s definition of a downturn differs to the market’s view.
Having said that one thing that the Union has had in abundance until very recently is confidence.
Until this week’s ZEW data saw a significant downturn in both Germany and the wider Eurozone, it had been incredible just how well confidence had held up.
Data for industrial production in Germany was released yesterday and the numbers showed a decrease but by less than analysts had feared. While several members of the Union remain in lockdown, activity remains reasonable.
There was an announcement by the EU’s Budget Commissioner yesterday that the EU plans to raise Eur 800 billion in debt to fund the recovery. This will be in the shape of bonds repayable in 2058. The issue of bonds will be in tranches of Eur 150 billion until 2026. It is unclear if this is in addition to the Eur750 billion still under consideration but that is doubtful.
ECB President Christine Lagarde spoke yesterday. She commented that the level of the fiscal response to the Pandemic will raise GDP by 0.3%.
That seems to be a great deal of effort for a relatively small return.
She acknowledged that countries dominated by tourism will take longer to recover than the rest of the Union and the ECB stands ready (again) to lend further support.
Following the global recovery from the Financial Crisis, Central Banks had generally taken a back seat in allowing markets to find their own level.
Now, they are back and demanding markets dance to their tune.
The single currency continues to defy gravity but with good cause in the short term. The ECB will be prepared to tolerate the negative effect on exports for now, given the dampening effect on inflation.
It rose to a high of 1.1987 yesterday, closing at 1.1980. It is hard to justify a break of 1.20 but that is now a real possibility.
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.”