16 March 2021: Surge in confidence unprecedented

Surge in confidence unprecedented

16th March: Highlights

  • Thornton’s meltdown the shape of things to come?
  • FOMC unlikely to move
  • Brussels simply cannot get vaccine distribution right

Budget, easing of lockdown and vaccinations drive optimism

The Ipsos MORI Political Monitor which measures confidence in the UK showed that 43% of the population believe that the economy will improve in the next twelve months.

The survey showed that confidence is at its higher level since 2015, ironically just as the Brexit campaigns were beginning.

While that is hardly surprising, the main thing to take away is the belief that the Government is dealing with the current crisis in a manner that will lead the country back to some kind of normality.

Andrew Bailey, the Governor of the Bank of England, spoke early yesterday morning about his confidence that the course that has been set by easing of monetary policy and recent fiscal support means that the economy will attain a level higher than at the start of the Pandemic sooner than had been expected. It is expected that will happen around the end of the year.

While optimism continues to rise, there is still the concern that the return of children to school just over a week ago may lead to an increase in infections.

The government hasn’t yet published its plans on how the data will be studied so it will still be a few weeks until it is known whether the April 12th reopening of retail outlets will be allowed.

Bailey went on to talk about rising inflation and the fact that he expects the Government’s 2% target to be reached and breached within months.

Globally, Central banks are prepared to allow inflation to move higher, above target in many cases, given the slump in prices that has been brought about primarily by monetary policy actions and the significant drop in the oil price.

It was significant that Bailey was unusually verbose in his comments about his confidence in the recovery given that the Bank of England’s Monetary Policy Committee will meet later this week and there is room for disagreement over the need for negative rates later in the year.

Over the past few days, news emerged that UK exports to the EU slumped by over 40% in January. While this is blamed on the bureaucracy surrounding Brexit, there may also be some disingenuous actions by Brussels to punish the UK for its decision to leave.

The hard-to-understand row that has broken out over movement of goods through Northern Ireland has led to the EU Commission moving its threat to take legal action over the UK’s decision to change the rules, forward.

The pound was particularly volatile yesterday as there was a degree of position shifting ahead of Thursday’s BoE meeting. There was also some selling driven by the pound’s inability to break through technical resistance.

It fell to a low of 1.3852, closing at 1.3897. It remains fairly buoyant versus the single currency, closing yesterday at 1.1648. Further progress may be decided by the fate of the euro.

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It is not unusual to say the upcoming FOMC is crucial

Even when it does nothing, the FOMC has the knack of reassuring the markets.

That comfort blanket may be becoming a little unnecessary as the economy slips the anchor that was holding it back and heads for the open waters of recovery.

One of the unwritten rules of the FOMC is that it must always appear to be in control. When Alan Greenspan walked into the boardroom of LTCM all those years ago, those present knew that all would be well. The same is true of Ben Bernanke and his helicopter money.

Powell now needs to continue to support the still nascent recovery while dealing with the tsunami of activity that is going to be created by the Biden Bill.

Every mention of inflation will draw gasps from traders analysts and investors alike.

The three tests of a recovery are now complete; sufficient stimulus, control of the Pandemic and a rally in employment, have been met so it will be difficult for Powell to remain on the bucking bronco of inflation long enough to get it under control.

We can all see now why he appeared to be so premature in telling the market that the Fed would allow inflation to overrun the Treasury’s targets. It was as good a piece of advance guidance as we have seen in years.

Later today, retail sales data for February will be released. It will have the potential to disappoint the market, falling from a 5.3% increase in January, into marginal negative territory. With what is coming from the March data, the level of disappointment should be almost impossible to spot.

With the people knowing that stimulus cheques were on their way no one would have been foolish enough to go out and spend their own money!

The ability of the Treasury to keep a hold of a dollar which is showing all the signs of wanting to break significantly higher, may test the resolve of Janet Yellen although the fact that she is in lock step with Powell will certainly help.

Yesterday, the dollar index rallied to a high of 91.96, closing at 91.80.

Vaccine nonsense goes on

It seems that every day that goes by there is another story regarding the EU’s vaccine programme which erodes confidence in the ability of the Commission to manage the programme and draws regret from those countries that opted into a centrally managed programme.

It seems that Brussels refuses to figuratively use the evidence of its own eyes. Germany approved the AstraZeneca vaccine then banned it for over 65’s, then decided it was safe for everyone.

Now it is apparently causing blood clots based on flimsy evidence. Its use in the UK has gone without a hitch but it seems the UK is now not to be trusted in any way.

Yet again using a nautical metaphor, Brussels appears perfectly able to keep the ship travelling in a straight line in calm waters. However, as soon as a squall comes along, the shouts of man the lifeboats begin.

With Italy now under a lockdown, the last thing Rome needed to hear was that one of the two major vaccines had been withdrawn however temporary that may be,

The FOMC and Bank or England meet this week and the Fed is likely to inadvertently help the ECB in its efforts to drive any export led recovery, but the U.S. Treasury is equally determined that there will be no return to a strong dollar policy, since that has driven industrial production overseas.

The battle for dominance between the haves and have nots continues. The Portuguese Minister of Finance yesterday commented that the Union is far from out of the woods.

The real power behind the ECB, the Eurogroup, met yesterday and it appears, for now, the have nots hold sway. They agreed that the growing debt pile would only be addressed once the health crisis is at an end.

The next row will doubtless be over when the crisis can be considered over while the ECB simply decides to watch and wait.

The euro fell through support versus the dollar yesterday. It reached a low of 1.1911 recovering to close just above support at 1.1926.

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.”