18 May 2020: Sterling on a slippery slope

Sterling on a slippery slope

18th May: Highlights

  • Sterling falls as twin concerns grow
  • Second Covid-19 spike now a major concern
  • Germany slips into recession

Brexit returns to haunt Sterling

The pound had its worst week since the lockdown began last week as concerns over the pace at which the economy can recover from Covid-19 mixed with concerns over the intransigence of both sides regarding Brexit to create a toxic cocktail.

The Government’s plans to provide a little comfort to the population in the shape of a marginal lifting of restrictions appear to be close to unravelling as Trades Unions try to ensure the safety of their members in light of what they consider to be the unplanned and uncontrolled of the return to work, in particular the plans to see children of certain ages return to school. This is slated by the Government to happen on June 1st but according to several Government ministers, this will only happen if it is safe to do so.

Chancellor of the Duchy of Lancaster Michael Gove may not have got the memo as he inflamed an already delicate situation by commenting on TV that it was safe for children to return to school despite several contradictory reports.

The current standoff between the Teacher’s Union and the Government could become as symbolic of this Administration’s control as the Miners dispute with Margaret Thatcher some forty years ago.

Brexit talks continue, with any agreement over the future relationship and a trade deal as far away as ever. The financial markets have become unsettled by this since there is little hope of Boris Johnson withdrawing his demand that if no deal is found by December 31st, then the UK will leave without one That threat is becoming more serious almost daily for Brussels since a no deal departure may see the UK withhold the divorce payment of £39 billion.

Last week, the pound fell to a low of 1.2101 versus the dollar, closing at 1.2120. Against the euro, it was a similar story. It fell to a low of 1.1186 and closed just two pips above that level.

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Taking chances while the Government loses control

Over close to 250 years the U.S. has grown in power to be the strongest nation on earth. Many will argue that that period is coming to an end with the rise of China, but the country appears to be coming closer to shooting itself in the foot.

Part of its strength has been in the unity yet diversity of the 50 States of the Union. However, without anyone noticing that unity may be starting to unravel. With an approval rating of just 44% President Trump is in danger of mismanaging the entire country into crisis.

With close to 30% of total deaths from Covid-19 happening in either New York or New Jersey States, there is zero chance of any lifting on lockdown being lifted any time soon in te east pf the country, despite the growing desperation that it should/must happen.

By comparison, with states like Oregon, Wyoming and Montana having had less than ten deaths each in total, there is a restlessness developing that the restrictions should now be lifted.

The Federal Authorities can only control this issue so far, while the economy continues to suffer, and the President makes what are being considered more and more wild predictions.

There is no dispute that the economy is suffering its worst downturn since the Great Depression in 1931 but the national psyche demands that every person stands on their own feet. We will have to wait and see how that works out.

This week, the minutes of the most recent FOMC meeting will be released. While there was no change to official rates as rates were cut twice intra-meeting, there was a sense that the FOMC Chairman has his finger on the nation’s pulse and his foot poised over the accelerator.

The Federal Government has been successful in propping up workers who have lost their jobs and businesses that have been affected by the pandemic, while the Treasury has demonstrated its understanding of the economic need for the people to have cash in their pockets to help the country survive.

In an interview last evening, President Trump accused China of taking down the U.S. economy. This was the latest in a series of barbs adding spice to the ongoing trade dispute.

Last week the dollar index rose to a high of 100.56, closing at 100.36 as bleak U.S. data and concerns over a second spike hit risk appetite.

Germany produces recession credentials

Germany became the first G7 nation to enter an official recession last week as its economy has nor contracted for two consecutive quarters. It was closely followed this morning by Japan.

Following a 0.1% fall in Q4’19, the German economy contracted by 2.2% in Q1’20.

Despite having among the lowest death tolls in Europe from Covid-19, the German economy’s reliance on exports has been brought to the fore.

It has been a well-trod path for Brussels and the ECB to call for greater inter-EU trade but so far this is the first time there has been numerical evidence to back the anecdotal.

The QoQ fall of 2.2% led to a year on year contraction of 1.9% which demonstrated clearly just how long the German economy, the powerhouse of the Eurozone, has been suffering.

Eurozone GDP contracted by 3.8% in Q1 but as with both the U.S and UK economies, this is seen as a mere appetizer for what is to follow.

The simmering row between the German Constitutional Court and the European Court of Justice continues with Ursula von der Leyen seemingly either unaware of any solution or unable to intervene in the process.

Meanwhile the dispute over finance continues as various pandemic ravaged economies slowly open their shops, bars and even football stadiums to a limited degree.

Despite the array of bad news for the Eurozone economy, the euro managed to hold its own versus the dollar last week. It fell to a low of 1.0774 but rallied to close at 1.0820, a fall of just 20 pips on the week.

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.”