15 June 2021: Reopening delayed until 21st July

Reopening delayed until 21st July

15th June: Highlights

  • Sunak sees extension as temporary, no interest in longer furlough
  • This meeting may define Powell’s Chairmanship
  • Euro heading lower with or without Fed help

Gloomy predictions mar safety first policy

Last evening, Prime Minister Boris Johnson announced the news that many had expected, and others had feared.

The complete removal of Covid-19 restrictions has been postponed until 21st July.

Johnson refused to commit 100% to that date, but said that prudence in the face of the virulence of the delta of Indian strain of the virus meant that as many as 10 million more people could receive vaccinations.

It is ironic that having been criticized for being slow to react to growing cases in the early days of the pandemic with delays in lockdown rumoured to have cost perhaps thousands of lives that a final, cautionary approach is attracting headlines like will we ever be free?

The economic recovery is unlikely to be set back too far, if at all, by the delay.

The Chancellor, Rishi Sunak reacted to questions over an extension to the Government’s furlough scheme by affirming his belief that the delay will only be a temporary setback and no extension will be considered.

The change that has already been announced to the furlough scheme where firms have to contribute 10% of the cost will remain in place.

With several sectors of the economy seeing another month of outgoings with no change to their status, the decision is unquestionably unpopular, but in the cold light of day it makes sense and complies with the Government’s mantra of always listening to the scientists.

The Federation of Small Businesses has urged the Government to take various steps to ensure that its members are in a position to reopen when that day eventually arrives.

It has been suggested that bounce back loans for businesses that are still unable to reopen be written off and business rates holidays for those businesses be extended.

Having spent over £400 billion keeping the country afloat, Johnson’s latest call is to ease off a little on the accelerator. That is expected to add £3 billion to the costs of the Pandemic to several hospitality and entertainment businesses.

The pound wasn’t particularly phased by the announcement, although it did fall to the bottom end of its recent range. It reached 1.4070 before bouncing back to close at 1.4110.

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Powell to seek belt and braces support before rate hike

The way that the discussion over tapering has been described makes it look like this week’s FOMC meeting will be more like a tea party than perhaps one of the most important conversations for the economy since the financial crisis.

Jerome Powell has continually adopted a languid style since his appointment as FOMC Chairman.

This has contrasted with the more gung-ho attitude of his predecessor and current Treasury Secretary Janet Yellen.

Powell is determined that the economy will be 100% solid and any risk of a slower than expected recovery be completely eradicated before the tapering of monetary support and a rise in short term interest rates takes place.

The attitude of analysts and investors is that given the rapid rise in inflation which touched 5% in May that the Central bank should at least be having a serious conversation about the effect of continuing stimulus on prices.

Powell, backed by members of the FOMC, believes that the economy can stand a little inflation, in order to see the recovery be both permanent and undeniable.

Powell has adopted the term transitory to describe rising inflation but has refused to speculate on how high it could go and how long it will last for.

The dollar index is beginning to look a little like a coiled spring as traders await news that at least the Committee have had a conversation.

While Powell will announce the headline news that bond purchases and interest rates will remain unchanged, the market will have to wait three weeks to understand the attitude of the Regional Federal Reserve Presidents who make up the rest of the FOMC.

Having flirted with the resistance at the top of its short-term range recently, the dollar index is poised for another attempt. Yesterday, it touched 91.60 again, but the correction from that level was shallow, and it closed at 91.50.

Lagarde brushes off her dovish persona

ECB President Christine Lagarde is taking a far broader view of the Eurozone economy than several of her colleagues on the rate setting government council.

Many members see a dark cloud approaching as inflation continues to rise, albeit at a more moderate pace than being seen in the United States.

While Lagarde is far from sanguine about inflation, she believes that a balance between rising prices and an economy that is gaining strength and long-term health can be struck.

Inflation has been held at bay for several years which has been seen in several capitals, notably Frankfurt, as a sign that the investment that has been made in shoring up ailing economies of the region has been worthwhile.

There were predictions when the Eurozone was first considered that one size fits all monetary policy wouldn’t work. While there has been significant hardship over the control exerted by Brussels over debt to GDP ratios, from a purely economic perspective the fact that no nation has been forced out of the euro can be seen as a success.

There is a clear taper or wait discussion to be had which may already be taking place away from the glare of ECB meetings and the result is too close to call.

Yesterday, the Lithuanian Central Bank President commented that it is too early to be discussing tapering. He confirmed a possible timetable, further commenting that September forecasts are needed before such a discussion takes place.

His words did resonate with those of Christine Lagarde, who also believes that the time for a tapering of support hasn’t yet arrived.

The concern in the more hawkish Central banks is that the pace of the rise in inflation could increase if the support remains at its current level as the economy begins to exhibit a more robust degree of health.

The euro continues to await news from across the Atlantic.

Yesterday, it again fell below 1.2100, reaching 1.2191 but it saw no particular recovery, closing at 1.2119.

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.”