18 December 2020: Sunak buys time

Sunak buys time

18th December: Highlights

  • Bank of England warns of unusually uncertain future
  • Employment heading in the wrong direction
  • Mixed news but major issues continue

Furlough extended for another month

Brexit is still just ahead of Coronavirus on the list of short-term drivers for both the economy and the pound.

Johnson and von der Leyen had yet another phone conversation last evening and according to Michel Barnier, a deal is still possible by tomorrow with ratification by the EU Commission on Sunday. That view is countered by UK Government Minister Michael Gove who commented yesterday that he believes the chances of a deal are less than 50%.

The review of the lockdown tiers has been carried out and Health Secretary Matt Hancock announced yesterday that only very minor positive moves from tier three to tier two would take place. Having placed London in tier three earlier in the week, several other areas of the South East of the country were moved up to tier three.

It is therefore slightly incongruous that Westminster and the three devolved administrations have agreed to leave the relaxation of restrictions over the Christmas Holiday in place with just a request that people behave sensibly.

In what appears to be a nod towards the ongoing seriousness of the Pandemic despite the growing number of people receiving the vaccine, Chancellor Rishi Sunak announced yesterday that the furlough scheme would be extended until the end of April next year.

Yesterday’s monetary policy committee meeting left interest rates unchanged as the debate around the effect of negative interest rates continues.

Bank of England Governor Andrew Bailey commented at his press conference that the future remains uncertain given the as yet unknown outcome of Brexit negotiations and the period of time that tier three restrictions will stay in place.

On a more positive note, he believes that several of the concerns mentioned at the last MPC in November will be alleviated as the rollout of the vaccine gains pace.

He did, however, add a further note of caution, commenting that Q4 GDP growth is likely to be a little weaker than forecast in November due to the fall in global activity driven by the continued growth of Coronavirus in many areas of the world.

Sterling awaits news of a Brexit deal, remaining well supported. Yesterday, it rose to a high of 1.3625, closing at 1.3560.

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Biden’s team will need to address the jobless slide

President-elect Joe Biden has assembled an impressive group of financial and economic experts to serve on his Cabinet, headed by former Federal Reserve Chairman Janet Yellen.

They will need to get to work immediately once they are handed the keys to the Treasury, as the most visible effect of a slowing economy, unemployment, has now definitely gone into reverse.

Yesterday’s weekly figures showed a rise in jobless claims from an upwardly revised 862k to 885k. While the rise is small in percentage terms, it sends the unequivocal message that the recovery is stalling. The four-week average rose from 778k to 812k although the number of continuing claims fell.

While even the Federal Reserve acknowledges that the vaccine rollout is likely to have a significant positive effect, it is going to take some time, probably at least the entire first quarter, for any effect to be seen. That is without any real knowledge about how great take up will be.

Despite gloomy jobless data, the economy is likely to grow by around 6% next year having fallen by close to 4% this year,

With Congress still debating a package of measures to help those whose jobs have disappeared, several other ancillary packages of support will expire at the end of the month. In the short term, it seems that only an agreement in Congress can arrest the rise in job retention and creation.

Jerome Powell has been saying for some time that fiscal support is vital to stem the flow of negativity that continues to affect output and productivity as well as confidence.

The dollar index continues to suffer. It shows how low risk appetite had fallen as cases of Covid-19 grew globally given the view that the vaccine is likely to be a panacea for the world economy. The index fell to a low of 89.73, closing at 89.77.

Although the fall has been fairly precipitous the fact that it hasn’t accelerated despite breaking several long term supports shows that there is a degree of concern that it may turn around in the short-term and no one is taking on systemic short positions.

Stronger currency and minor improvements hide issues

The financial markets appear, for now, prepared to take what is happening in the Eurozone at face value. Leading indicators of economic activity are leaning towards a more positive picture while data remains blurred.

The euro continues to rise, mostly on the back of a weakening dollar while the effect of Brexit, no matter how the talks end, is being significantly underplayed.

Reality remains less encouraging. Germany is already in a national lockdown and Angela Merkel has already intimated that the end date of January 10th is likely to be extended. The Netherlands has already followed suit while other nations will also follow.

The economy is still faltering, and improvements seen recently to output have seen the data remain in contraction.

The ECB continues to pump liquidity into the economy, but the level of bank lending is well below pre-pandemic levels. The Central Bank appears to be hell bent on maintaining unprecedented levels of bond ownership as its balance sheet continues to grow.

The manner in which this position will be unwound is barely discussed despite rumblings from a few borrowers about perpetual bonds and debt forgiveness.

The budget and support package remain in limbo and that is probably the most obvious marker of the systemic issues that the EU faces. In such a large and growing Union, unanimous decision making is close to impossible and the use of vetoes has slowed progress across several major issues. That is without even considering the current issue of Hungary and Poland.

Nevertheless, the euro continues to rise in a slow and apparently solid manner.

Yesterday, it rose to a high of 1.2272, closing at 1.2262. With the Holiday Season almost upon us, it seems that the single currency is likely to end the year on a positive yet fragile note.

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.”