16 June 2021: Imaginary doubts won’t halt progress

Imaginary doubts won’t halt progress

16th June: Highlights

  • Claims for more support accompany extended lockdown measures
  • Dollar index takes a break before the action begins
  • Lagarde’s ECB seems to put style over substance

Affected businesses have little impact on economy

There hasn’t been too much of a backlash over the government’s decision to extend the lockdown by four weeks. The major effect has been for those affected to demand that the Chancellor either provides additional support for those most affected or to extend measures that are about to be changed or removed entirely.

Analysts see the changes that are imminent to the furlough scheme as being both critical and a significant litmus test for the recovery.

Since the measure was introduced, it has been fairly easy for businesses to keep employees on the books, no matter the state of the company’s order book or cash flow.

Now, with businesses expected to contribute to furlough payment as a staged withdrawal begins, it may be a different story which will provide a more genuine picture of the state of the economy.

The data released yesterday that referred to April was fairly unremarkable. There was a decent fall in the claimant count, and the rate of unemployment fell from 4.8% to 4.7%.

Having seen declines over several months, there is a possibility that the rate of unemployment could rise as those companies that have been barely scraping along despite the support, become non-viable.

It has become a common trait for every agreement that is reached or deal that is done to attract its own share of criticism.

This has again manifested itself in the trade agreement that has been negotiated and signed with Australia.

Critics say that the rush to sign deals with as many countries as possible to show the world that the U is open for business is being done at all costs.

The UK will now be able to export cars, whisky and confectionary tariff-free to Australia, but farmers are concerned about the effect on their businesses from mostly meat products travelling in the opposite direction.

The pound has succumbed in the short term as traders position themselves ahead of tomorrow’s rate decision from the FOMC.

It fell to a low of 1.40.34 and the subsequent recovery failed to reach 1.41 as it closed at 1.4081.

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Can he admit to a discussion on tapering?

Several media outlets have echoed the feeling that the FOMC meeting that is taking place this week is the most important of Jerome Powell’s tenure as its Chairman.

Powell has faced tough times, with President Trump, when looking for a scapegoat, often turning to Powell. He publicly threatened to sack Powell and to some it is a surprise that he didn’t.

Powell possesses a lawyer’s demeanour that while not always suited to the rough and tumble of financial markets provides a clear unambiguous message.

If the market chooses to ignore the message to demand greater detail, That, in Powell’s mind, is not his concern.

Presiding over the significant amount of support and stimulus that has been provided by the new Administration has been tough at times.

Striking the right balance between tapering bond purchase and ensuring the economic foundations are solid has required timing. Powell has made it clear that it is the decision of the FOMC, and he is not about to reveal the methodology that they are using.

The rise in inflation to 5% that was announced last week has ramped up the pressure on both Powell and his colleagues but as their official voice, he has remained stoically on the path he feels to be correct.

The data for retail sales which was released yesterday was disappointing with the headline falling 1.3% from April’s 0.9% rise. Bottlenecks in the supply of parts for the automotive industry were a major contributory factor.

The dollar index continues to toy with long-term resistance at 90.60. Yesterday it breached that level again briefly but fell back to close at 90.52.

Accompanying tomorrow’s rate decision and Powell’s press conference will be the Bank’s economic forecasts. These will provide the market with an opportunity to shed more light on the Fed’s thinking.

ECB less pragmatic than under a bureaucrat

Over her career, there has been plenty of criticism levelled at Christine Lagarde.

She has been seen as a compromise candidate before, and was seen as such again when Angela Merkel threw her support behind her in an effort to have Ursula von der Leyen appointed as EU Commission President.

This is despite it being clearly Germany’s turn to hold the Central Bank Presidency. To his undoubted credit, Jens Weidmann remained in his post, perhaps understanding Merkel’s decision, or more likely accepting the benefit of remaining within Europe’s financial inner circle.

Lagarde is something of a figurehead at the ECB, but at least now she is both realizing that there are those better placed to comment on the nuts and bolts of economic developments and allowing them to put forward their own opinions.

Yesterday Olli Rehn, the Governor of the Bank of Finland backed her assertion that the rise in inflation is temporary with sufficient accentuating circumstances to prove the point. He commented that the current level of inflation is driven by one-off and temporary factors.

One long-running saga that may be coming to an end is the dispute over state support in the aircraft manufacturing sector.

There has been an almost continual series of threats and counter threats over what is and isn’t allowed to ensure market pre-eminence for Boeing and Airbus.

EU Commission President von der Leyen confirmed yesterday that progress has been made in discussions and an end to the saga is in sight.

One of the major ratings agencies, Fitch, has upgraded its forecasts for both GDP and inflation for the Union.

It sees 2021 full year growth at 5%, up from 4.7% previously. They agree with Olli Rehn and most of his colleagues at the ECB that the rise in inflation will be temporary. Nevertheless, they have increased their forecast for it to reach a peak of 2.5%, but this will happen more gradually and decline more rapidly.

Yesterday the euro joined the slumber party. It fell to a low of 1.2101 and closed at 1.2126.

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.”