19 June 2020: Improvements don’t deter BoE

Improvements don’t deter BoE

19th June: Highlights

  • Bank of England adds further support
  • IMF agrees with Powell caution
  • Euro treads water as Market awaits summit

Bailey cites global slowdown

There is a degree of expectation growing that although the contraction in the UK’s Q2 GDP will be severe, it may not be as bad as had been predicted. That means a contraction of nearer 20% rather than closer to 40%.

With that in mind, the Bank of England pumped a further £100 billion into its QE programme at its Monetary Policy Committee meeting yesterday to add a level of security to the economy. The Bank did agree to slow the pace at which it hoovers up Government bond issuance. This will require private investors to take up the slack. This is a move which shows a degree of confidence in economic activity.

The only dissenter to that decision was Chief Economist Andy Haldane. Since he is not shy of giving interviews, the market may hear the reasoning behind his vote before the official minutes of the meeting are released in the coming weeks.

Haldane’s initial comment was that he believes that the recovery in the economy is happening sooner and materially faster than seen last month.

The committee voted unanimously to hold interest rates at 0.1% as speculation over a move to negative rates has faded. Speculation remained that the base rate may be curt to zero, but it appears there was not even any discussion of this.

Andrew Bailey, the Governor of the Bank still sounded a note of caution at his post-meeting press conference, saying that the jobs market had become slightly more tilted to the downside since May’s MPC meeting and this was a factor in the decision to add more stimulus.

Bailey went on to say that as the lockdown is gradually lifted the market will continue to be cautious since these are unprecedented times.

The pound continued its recent fall yesterday, breaking through the support at 1.2500 versus the dollar. It reached a low of 1.2401, closing at 1.2424

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Fund sees greater slowdown than previously expected

The IMF will issue its official World Economic Report next week but is well known for releasing a few tasty titbits in advance.

The Fund is concerned about the pace of the recovery in the U.S. economy despite encouraging data having been seen recently. It believes that a significant fall, in the circumstances that have been seen, where there was no gradual fall but an immediate slamming on of the brakes would lead to an immediate opposite reaction. However, the lockdown has lasted longer than even the Administration expected so the recovery is likely to take longer.

As seen in other major economies it is going to still be employment that provides the most significant drag despite stellar data for May. Unusually, and due to the Independence Day celebrations falling on a weekend, the June employment report will be released on Thursday July 2nd.

While the market will be more prepared for a surprise, there are concerns of a significant adjustment to the May data.

Global activity is beginning to recover with China starting to show signs of life, but the second spike centred in and around Beijing could easily cut off improving growth.

The IMF’s best-case scenario for the U.S. is for a 5.9% contraction this year followed by a 4.5% rebound in 2021.

Jobless claims appear to be levelling off with 1.5 million new claims made this week which was almost identical to last week’s number. This may be another signal that the recovery will be U-shaped at best with the Administration’s expectation of a V-shape proving a little optimistic.

Yesterday, the dollar index continued to return to levels seen in the recent past. It reached a high of 97.58, closing at 97.45

Autumn of discontent is a genuine concern

Although an agreement on the size and makeup of the EU Recovery Fund would be a welcome result of the EU Summit which begins today, it is a show of unity that will be almost as important to market observers.

Even before the pandemic hit the region in late February there had been growing cracks in both the direction EU members wanted the Union to take and just as importantly how that goal could be achieved. Now, having been thrown another significant curveball the idea of a shared goal has slipped further.

One of the more surprising reactions to the early days of the pandemic was the closing of the borders coupled with the what I have I keep attitude to medicines and medical supplies.

Now, as borders are reopening, the level of cooperation needs to be ramped up but there are still major issues to be worked around regarding the size and makeup of the additional funding that is necessary.

It is likely that the recently agreed budget will be diverted into an aid package to help both those most affected medically like Spain and Italy as well as those most likely to be hit economically, like the countries of the east of the region. If that happens there will need to be an additional budget discussed and agreed long before the current one expires in 2027. This should prove easier to achieve since it is not without precedent.

Today’s meeting could see three possible outcomes: An outright disagreement with the frugal four standing firm (25%), a watered down arrangement which goes some way to satisfying all parties (45%) or an agreement to hand the reins to Finance Ministers as has happened before (30%).

Yesterday, the euro fell versus a strengthening dollar as it awaits news from the EU Council. It fell to a low of 1.1185, closing at 1.1205

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.”