16th February: Highlights
- Sterling close to three year high versus USD
- Biden to host G7on Friday. Will discuss China Covid and Global Economy
- Technocrat Government, just what Rome needs
Optimism over lifting of restrictions lifts Sterling
It may very well be that the fact that it managed to order so many doses so early was sheer luck, but getting ahead of the game just once, could prove to be the decisive act economically, if not socially.
At yesterday’s Covid-19 press briefing the Prime Minister announced that he would announce the roadmap out of the lockdown restrictions next week and that progress would be cautious but irreversible.
It is likely that schools will reopen on March 8th as the first of many actions that will slowly return the country to something approaching normality.
Chastened by so many accusations of being too slow to react, the Government yesterday finally began its programme of isolating arrivals to the UK of visitors arriving in the country from the 33 red-zone countries. It remains to be seen if the move manages to cut off the import of variant strains of the virus. If not the success of the vaccination programme could, in the end, count for nothing.
BoE Chief Economist Andrew Haldane is convinced that the lifting of restrictions will release a wave of pent-up demand that will see the economy expand to such an extent that it will be back to pre-Covid levels far sooner than had been previously anticipated.
Fears over a fall in the importance of London as the major provider were allayed a little yesterday as it was announced that around 50% of all foreign exchange transactions globally were performed by banks in the City.
The pound continues to be buoyed by the positivity provided by the sheer volume of vaccinations taking place.
Against the dollar, it rose to a high of 1.3919, closing at 1.3906. The outlook remains positive, but it is entering an overbought condition which may see a minor correction before it pushes higher.
GDP could rise by 5% in 2021. Next three months critical
There have been several warnings that the dollar is not a one-way bet and a recovery in the index is likely to take place as the recovery takes hold and a tightening of monetary policy, possibly to head off rising inflation comes into being.
However, tightening of policy will lag growth by some distance considering the dovish comments emanating from both the Fed. and the Treasury.
A return to pre-Pandemic levels is expected to be achieved by the middle of this year as the economy grows by between 4% and 5% in 2021.
According to the Congressional Budget Office, the economy is expected to grow at around 2.6% in each of the next five years. That is well above the long-term average of 1.9%. This will have a lot to do with more support from accommodative fiscal policy.
The level of the dollar index remains counter intuitive as it continues to fall, driven by improving global risk appetite, despite the degree of optimism surrounding the recovery.
This will remain until it becomes unavoidable that the greenback is severely undervalued particularly versus the euro and a sea-change in monetary policy takes place.
U.S. politics for the next four years was irrevocably changed by the results of the runoffs that took place in Georgia in early January.
The result meant that, although President Biden would continue to play nice, since that is the nature of the man, he ultimately held control of both houses and could push his agenda forward at will.
That means that despite the natural opposition of the House Republicans, a $1.9 trillion stimulus and support package is in the pipeline.
The dollar index remains in a narrow range that has barely changed in five days. Yesterday, it traded between 90.44 and 90.26, closing at 90.36.
Brussels concerned that a technocrat may want departure
So, it has been in Italy where several coalition governments, reacting to pressure from every party to the alliance, have driven the country’s performance into the ground.
Mario Draghi is the ultimate technocrat. The level of knowledge and crisis management he brings to his new role is unsurpassed. He has, however, been thrust into a role to which he is inexperienced, and he will need to be a quick learner, if he is to drag the country back from the precipice as he did with the single currency.
His famous whatever it takes refrain is causing a few nervous flutters amongst his fellow technocrats in Brussels.
They know full well that a technocrat could easily decide that the future of Italy as a member of the EU is in the balance.
The radical nature of Italian politics means they have an attitude of throwing the baby out with the bathwater. That is to say that if the electorate decides that one system isn’t working, they are well prepared to tear up the blueprint and start again. This attitude has been seen over several elections.
It is short-termism in the extreme and were the question of both Eurozone and EU membership be put to the people it is highly likely that would vote to leave.
The EU’s level of general manufacturing output remains resilient, thanks mainly to export performance. Domestic demand remains weak due to lockdown conditions, but the level of pent-up demand is considered to be far less than in either the UK or U.S. In any event changes to restrictions are likely to lag other G7 nations due to the continued issues with distribution and delivery of vaccinations.
GDP data is due this morning with expectation that the Eurozone economy will have fallen by 5.1% in 2020. As in other nations, it is only really Q4 that matters in forward guidance. QoQ growth is expected to have fallen by 0.7%.
To a certain extent this will be a comment on the social versus economic effect of the restrictions.
Yesterday, the euro attempted to test its short-term resistance. It Is unclear whether there is selling interest in the single currency or buyers of the dollar index that is holding the two currencies in such a tight grip.
The euro rose to a high of 1.2145 and closed at 1,2131.
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.”