UK Facing continued headwinds
Morning mid-market rates – The majors
17th December: Highlights
- Falling inflation gives BoE scope
- Falling retail sales ring alarm bells
- EU Commission optimistic about Q1 recovery
Slight pickup in December activity index
As the month has worn on, problems with freight services have led to issues in the supply chain. This can only worsen as the outcome of Brexit negotiations becomes known.
Unless the EU totally capitulates and gives the UK all it wants in talks, the situation post January 1st is certain to be worse than it is today.
No matter what procedures are set in place, documentary requirements, more customs checks and additional permits for UK lorries to travel unfettered across Europe will come into force. Brussels has suspended the need for new permits for lorries until June, but there will be issues over the use of the correct containers.
With London now in tier three of the lockdown measures, a significant hit to so much of the economy, particularly the hospitality sector, is inevitable. While there is no actual data available, anecdotal evidence shows that close to 30% of bars pubs and restaurants may not reopen when the restrictions end. That may not be until mid-February at the earliest given the spike in infections that has already been seen, and the Christmas “ease” yet to take effect.
The services sector is still under particular strain and since this is the most potent engine of the economy, a Q1 recession cannot be ruled out. That being said it is unlikely to develop into anything long standing as the vaccine programme gets into its stride.
A certain degree of growth in both the wholesale and retail sectors may be due to stockpiling brought about by either Brexit or the Pandemic or both but that should even out as both issues are finalized.
The pound is still being driven by a degree of optimism over a Brexit deal that allows the UK reasonable access to EU Markets. Yesterday, it traded between 1.3549 and 1.3434, closing at 1.3479.
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5% unemployment likely to be seen in 2021
This has now been more optimistically updated, possibly due to Jerome Powell’s expectation that fiscal support will be both massive and forthcoming in the short-term.
By definition, the Fed’s predictions mean that they do not see the second wave of Covid-19 having a dramatic effect on employment. This is presumably due to the production of a widely available vaccine.
Despite the better news about employment, Powell remained cautious in his remarks following the release of the forecasts. The next few months will doubtless be challenging.
The fed funds target has been left unchanged at 0% to 0.25%. Powell labelled the news of the vaccine as very positive but commented that new cases need to be quickly brought under control.
Commenting on Fed bond purchases, Powell said that the increase in the size of the Central Bank’s balance sheet has supported the economy. This was probably an oblique reference to the Fed being left totally exposed by the inaction of Congress.
The pace of the recovery has moderated but Powell was at pains to say that monetary policy will remain a powerful weapon in support of the economy.
Without referring to any change in the inflation target, Powell said that inflation is, and likely to remain for some time, well below the long-term objective.
The dollar index was under pressure for most of the day, falling to a low of 90.12. It spiked to a high of 90.70 immediately following Powell’s comments but settled back to close at 90.44.
Wait and hope now appears to be official policy
That is in contrast to just about every other forecast, comment or action taken in the past month or so.
With full lockdowns in place that will last well past January 10th, vaccination programmes not expected to be commenced this side of New Year and activity indexes buried in negative territory, it is hard to say where his optimism is grounded.
Gentiloni agreed that the lockdowns in Germany and The Netherlands would dampen domestic demand in the short term but he used the EU Commission’s magic phrase “we can hope to see green shoots later in the quarter”.
No concerns mentioned at all about the stance being taken by Poland and Hungary, no concern over deflation or the reliance upon a Central Bank whose cupboard is bare, just unfounded optimism.
There was a marginal improvement in December output data when the figures were released yesterday. Services remain in decline and the data relates to the period in the month before the lockdowns were brought into effect.
Brexit negotiations go on, but it is hard to predict just how the effect of no deal being announced before the end of the year would be dealt with in the supply chains of the major manufacturing and industrial nations.
The euro continues to be supported by the falls in the dollar index. Yesterday, it rose to a high of 1.2212, closing at 1.2183.
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.”