Sterling rally struggling for traction
Morning mid-market rates – The majors
1st April: Highlights
- Fragile pound rises on quarter end demand
- Ample liquidity pushes dollar lower
- Coronabond issue could provide the spark that blows EU apart
Quarter end adjustments provide short-term relief
The World Bank sees UK GDP back at pre-crisis levels by mid-2023, but that of course depends on when the Government regains control of the economy.
Economists will determine a point at which they are able to judge the start of the recovery, since every nation is striving for the same goal but using different strategies to reach their target.
Different nations will recover at different speed with measures that have been put in place turning from short-term necessities to long-term burdens. It is not a competition between G7 Governments to show they can add the most stimulus and borrowing limits and affordability are secondary in concern against the need to preserve life.
Following the initial rush to provide comfort to those employed but unable to work, the fine print is being drafted and the money is beginning to flow.
The death toll in the UK is rising exponentially, doubling about every four days. The peak is still some way away and until that is determined, the economy will continue to not only suffer but stare into a black hole of falling activity.
Today sees the release of manufacturing PMI data for March. While that data is significant, it is less relevant than in other nations given the dominance of the economy by the services sector. It will be no surprise that the outlook has weakened considerably but it is impossible to have anything but a stab in the dark as to how far it has fallen.
During March, the pound traded between 1.3200 and 1.1411 with daily gyrations almost impossible to predict. The largest falls were at the start of the month as G7 nations committed to huge stimulus packages, but it recovered over 30% of the fall in the second two weeks of the month.
Analysts do not see the rally as being sustainable with the pressure on the UK’s ability to stay the course as the debt mountain grows being called into question.
Yesterday, the pound rallied to a high of 1.2471, closing at 1.2416, just one tick above the open.
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Market confidence centres around Powell and Fed
Despite the increase in volatility, the net effect was negligible. It started the month at 97.87 and closed at 98.96. What went on in between made hedging exposure almost impossible.
The market has new-found confidence in Fed Chairman Jerome Powell who has emerged as a significant presence in the fight to protect not just the U.S.’ economy but the dollar’s status as the global method of exchange. In order to do that Powell has had to ensure there is a plentiful supply of dollars available and this has led to unprecedented levels of liquidity with further stimulus available when needed.
In financial markets as in many other walks of life confidence is a major factor and just as Alan Greenspan was at the centre of the aftermath of the crisis set off by the collapse of LTCM and Ben Bernanke first coined the term helicopter money as he engineered the recovery from the financial crisis, Powell is having his moment. He has faced severe pressure from the President’s constant criticism and sniping, but his appointment may prove to be an inspired choice by Donald Trump.
As in any economic recovery package engineered by any Central Bank, it needs to have time to work since turning around the economy is like turning an oil tanker given the size and complexity of the task.
The U.S. economy is likely to be dominated by Covid-19 data over the next month or two, then Powell will again be called upon to engineer the recovery.
Yesterday, the dollar index rallied to a high of 99.95 but closed virtually unchanged at 98.96.
Another storm or the final storm?
As already mentioned, confidence is a major factor and the insularity of individual nations is making the task of providing a region-wide plan impossible to conceive let alone implement.
The latest blow and possible coup de grace to the unity of the Eurozone is the issue of Coronabonds. While the attitude of Germany, Austria Belgium and The Netherlands is understandable given their past, it is just as understandable that Italy, Spain, Portugal and Greece would start to question the purpose of monetary union if not to provide succour in such times.
The Financial crisis caused a major split in the Union as the affluent northern nations placed crippling terms on the bailout.
That was only a financial or economic crisis and it was clear that, eventually, a recovery (of sorts) would take place. The present crisis is a whole new ball game, with lives being lost, so the unwavering refusal to sanction the issue of bonds guaranteed by the EU is more difficult to understand. The virtual summit held last week created genuine anger and a chance to demonstrate unity was lost.
The frugal four are unable to countenance the concept of bonds being issued that they will put their name to but will have little or no control over. Times change and whatever it takes means just that, and in such times taboos and decades old constitutional rules become outmoded. Europe is facing a risk that no one can be blamed for. In that sense the Covid-19 pandemic is symmetrical, but the effect is asymmetrical, and the most affected nations are the ones least able to cope.
Once this issue subsides and the EU begins to rebuild, it may be that Fairweather Union is the lasting takeaway rather than whatever it takes.
Yesterday the single currency traded between 1.1055 and 1.0926, closing at 1.1033
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.”