16 June 2020: Sterling climbs away from Support

Sterling climbs away from Support

16th June: Highlights

  • Two-way interest holds Sterling in a range
  • Fed official looking at H2 rebound
  • ECB facing massive loss of confidence.

Johnson and Von der Leyen promise fresh impetus

The pound gained a little ground yesterday as a meeting between UK Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen ended on a positive note with both committed to finding a way around the current impasse over a post Brexit trade deal and promising in Johnson’s words to put some oomph into the talks.

Yesterday was the first day of phase two of the easing of lockdown restrictions with non-essential retailers being allowed to open for the first time since March 23rd.

While the footfall led to queues outside most major retailers in city centres, the comparisons with similar days a year ago showed that the numbers of shoppers was significantly lower.

With it now generally assumed that in early July phase three will be introduced with the hospitality and service sectors being allowed open but concerns over social distancing and the two-meter rule remain. Unless the Government can find a way to keep the public safe while allowing pubs, restaurants etc. to open it may not be viable for them to do so.

Later this morning the May employment report will be released. Following the surprise data for the U.S., traders are surprisingly optimistic that there could be a similar bounce in UK data. This places the downside for the pound very much in focus with a disappointment set to see it test support around the 1.25 level versus the dollar.

Yesterday, the pound rose to a high of 1.2637 and it ended the day within a pip of that level.

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Employment to struggle to repeat May bounce

There is a considerable effort being made at the moment between the U.S. Administration and the Federal reserve to talk up the prospects for the. economy.

Following Senior Economic Advisor Larry Kudlow’s comments at the weekend about the economy being off to the races, Dallas Fed President and FOMC member Robert Kaplan commented yesterday that even though the unemployment rate may remain stubbornly high, the economy is set to recover the losses of the second quarter with a strong performance in the second half of the year.

Unusually for a U.S. official, Kaplan called for the public to heed the health warnings that exist now and new directives that may be issued in the future to protect the country from a second spike in infections.

Kaplan said that he saw the economy contracting by as much as 35% in Q2 and unemployment staying as high as 8% at year end. While this is an improvement on other estimates that put the jobless rate at above 10% it will still be uncomfortably high for President Trump as the Presidential campaign enters its final lap.

The Chairman of the Federal Reserve, Jerome Powell will begin his bi-annual testimony before Congress later today. While he is generally supported over the actions that have been taken so far to fight the Covid-19 pandemic, what plans he has going forward will come under scrutiny.

Powell is expected to be optimistic about the near- and medium-term outlooks and this should provide a little support for the dollar.

Retail sales data will be released today and following last month’s fall of close to 16%, a rise of around 4% is expected.

Yesterday, the dollar index fell to a low of 96.59, choking off its recent recovery. It closed at 96.66

Public trust struggling to recover from Financial crisis

A report released yesterday by the European Central Bank has admitted that the public’s opinion on the Central Bank is well below a level that shows faith in its ability to combat crises.

While that is hardly news to the financial markets, it is not really fair for the ECB to shoulder the blame for the Union’s inability to shake off the effect of the financial crisis, which took place ten years ago, alone.

In fact, the ECB is admitting to being a sacrificial lamb, since it has been expected to work in something of a vacuum given the distinct fracture between monetary and fiscal policy in the eurozone. It is almost impossible to fight the issues that have lined up against the Bank, virtually since its inception, with one hand tied behind its back.

Successive ECB Presidents have been rated by the market far higher than the bank has been considered overall. This is obvious in the case of former President Mario Draghi who, it was acknowledged, did all he could to protect both the economy and the currency from the worst of the banking crisis.

Yesterday, data for international trade was released by the Eurozone. It was hardly a surprise that the region’s surplus fell from Eur 28.2 billion in March to just Eur 2.6 billion in April, but it did serve to illustrate the point that the recovery from the current recession will be aided if the EU is able to live up to its original premise of being a trading block selling as much within its extended borders as it does to the rest of the world.

Today’s release of confidence data for both Germany and the entire Eurozone will provide further direction for the single currency. Yesterday it managed to move a little higher against a weaker dollar. It reached 1.1332, closing at 1.1323

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.”