15 October 2020: Volatile Sterling recovers 1.30

Volatile Sterling recovers 1.30

15th October: Highlights

  • No Brexit ratification at summit
  • Pandemic relief deal may not happen until January or later
  • IMF sees slower recovery than previously estimated

Hopes that a Brexit extension could happen drives pound

The pound had its most volatile day in terms of its range for over a month yesterday as the Government’s handling of the second wave of Coronavirus came in for some heavy criticism while Brexit negotiations provided a backdrop of uncertainty.

It is now fairly certain that the Prime Minister ignored the advice he was given by his scientific committee about a circuit breaker lockdown to arrest the spread of the virus. It was suggested by SAGE members that a complete lockdown for two or three weeks would see infection rates be brought back under control and provide a level playing field across the entire country.

Boris Johnson and his Cabinet chose to ignore that advice preferring to go with the localized three tier system he announced on Monday.

The problem that has been pointed out to Johnson is that when his actions were criticized during the first wave, he defended himself by saying it was vital that the Government follow the scientific advice.

Now, for the sake of economic expediency, he has decided that he is able to ignore SAGE and make decisions independently.

His credibility and ability to handle the pandemic are now open to question, and if he now has to move to a complete lockdown in a few weeks’ time, he is certain to be accused of dithering as he was when deciding the original lockdown.

In a call with EU leader Ursula von der Leyen last evening, the Prime Minister reminded Brussels of his pledge to walk away but then appeared to change tack and allow more time for negotiation by waiting for the outcome of the two-day summit, that starts today, before deciding on his next course of action.

When he made his ultimatum, he was well aware of the dates of the Summit, so he is again seeming to make things up as he goes along.

There were several rumours that drove Sterling first one way then the other yesterday as speculation grew that Johnson had already agreed to extend the time for negotiation until the middle of next month.

The pound traded in a range of 1.2863 to 1.3064 but, importantly, closed above the important 1.30 level at 1.3011.

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Inflation likely to be allowed to overshoot significantly

President Trump bravely announced his plans for the U.S. economy when he wins re-election next month with industrial and manufacturing independence from China to be the central plank of his plans.

Such a bold scheme would take many years to achieve and it is likely that, were he to win next month, it would take the entirety of his second term to even get the ball rolling.

This is without doubt a Trump attempt to play to the crowd, whipping up support using the jingoistic language of days gone by.

With the world having moved on since the large corporations, supported by Trump in his pre-Presidential days, moved output to the east, it is now close to impossible to wrest control of global manufacturing control from Beijing.

It is incredible to think that given the severity of the economic situation facing a significant proportion of the population and unemployment far from under control that there still has been no Pandemic Relief Bill presented to congress that is acceptable to both sides.

While the Republicans and Democrats blame each other, nothing is done at a Federal level to ease the suffering of those who have lost their jobs due to the Pandemic.

Treasury Secretary Steve Mnuchin commented yesterday that any chance of a Bill to be agreed pre-election was now all but over. It is difficult for President Trump or his opponent Joe Biden to take the moral high ground by blaming the other for what is becoming a national scandal since both know that they are equally to blame.

It could now be six months after the expiry of the first support package before another is agreed.

The dollar index reacted poorly to Mnuchin’s comments. They were exacerbated by the realization that it could be January or even February before an agreement can now be found.

If Trump is a lame duck President having lost the election there are likely to be challenges made to the result in an attempt to cling to some semblance of power, while a Trump victory would embolden him to make even tougher demands.

The index fell back to a low of 93.24, closing at 93.42. As long as it remains above support at 92.80, daily volatility will leave the upwards correction in place.

ECB members not happy with inflation targeting

French President Emmanuel Macron announced curfews in several French cities yesterday to arrest the spread of the second wave of the Pandemic but in a similar way to Boris Johnson, his every action is now subject to close inspection.

Following the introduction of his latest measures, the question is being asked: what is the point of introducing a lockdown from 10pm to 6am while most people will be at home asleep in their beds? This is unlikely to provide any relief from the spread of the virus and will hasten the country towards a complete lockdown.

A complete lockdown in France, about to become the second largest economy in the EU and striving to take its place as the shining light of Federalism, could prove disastrous for Macron in his bid for re-election in 2022 particularly if he is unable to protect French fishermen from losing their valuable rights to fish in UK waters post-Brexit.

Elsewhere in the EU, several ECB members are voicing their concerns over Christine Lagarde’s almost laissez-faire attitude to inflation.

While she tries to provide sufficient support to ensure that the economy can survive what could be an extremely difficult winter, she is being assailed by comments over an issue that is not even close to becoming a problem yet.

This issue only illustrates the growing problem over the fact that every member of the Governing Council wears two hats.

Given their responsibilities to protect their own economies as Heads of Central Banks in their own right, they see protecting the EU economy as a whole as secondary. This was perfectly illustrated by the President of the Dutch Central Bank in his recent comments over an increase to the Pandemic Relief Fund.

The euro has retreated back into its recent role as makeweight in the dollar index. Yesterday, it fell to a low of 1.1719 but climbed back to close the day unchanged at 1.1745.

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.”