1 March 2021: Hyperactive Sunak to protect upturn

Hyperactive Sunak to protect upturn

1st March: Highlights

  • Sunak put support above balancing budget
  • Biden’s stimulus package passes without minimum wage increase
  • Things to get worse before they get better

Housing support is a Tory staple

The Chancellor of the Exchequer Rishi Sunak will present his budget to Parliament this Wednesday.

From the degree of advance guidance that has been given it is expected to be supportive, with measures that have been put in place to protect those most affected by the Pandemic evolving into support for the most affected sectors and schemes to promote jobs.

This is going to be a gigantic balancing act and Sunak, who did the rounds of Sunday current affairs TV yesterday, promised to be honest with the public about the prospects for the country’s finances while providing a level of support that ensures that the recovery is both stable and robust.

The UK has now vaccinated 20 million people. This will provide a significant boost to Boris Johnson’s four step plan for exiting the restrictions with the first step next Monday when schools will reopen.

This massive feat means that 28% of the population has now received at least one jab.

Jobs will be the most significant battle to be fought, not only in the UK but across the G7 and beyond. With unemployment still rising in the UK, data last week showed the headline rate rising to 5.1%.

There is expected to be a massive increase in jobless numbers as the reality of the return to normality hits and the Government’s support packages are either withdrawn or turn from support into stimulus. This will see businesses in several sectors become unsustainable.

The Government will shield the economy from any knock-on effect, and this is clearly the thinking behind a measure that has already been announced. There is to be a £5 billion fund that will provide support to businesses such as pubs, shops, and hair salons to allow breathing space. Every such business will receive a grant of £18k.

A fund is also being set up to support the return of the 95% mortgage. This will provide another boost to the housing market but may come at the expense of the stamp duty holiday.

Kenneth Clark, a former Chancellor commented yesterday that now is the time to raise taxes before the country faces higher inflation that will lead to rising interest rates. That his comments were virtually disregarded is a testament to the grown-up way Sunak is expected to balance the books. He will cast aside Conservative dogma in favour of a rational and long-term strategy.

Last week the pound managed to reach a high of 1.4243 versus the dollar. It appeared to decouple from the volatility surrounding the dollar and react to its own positive drivers. It corrected late in the week to close at 1.3928 but has started the week on a positive note.

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Stimulus plan passes through congress

President Biden has managed to get his $1.9 trillion stimulus package through the House of Representatives although he will have to fight to raise the minimum wage to $15 an hour at another time, as the plan to include it was deemed unconstitutional.

The leap in personal income in January would, in normal circumstances, be considered as inflationary but with households benefiting from the arrival of stimulus cheques, the rise will be a one-off.

Just how and where the stimulus package will have an effect is yet to be seen and with the recent cold weather hampering the vaccination programme, its full force may take a few weeks to be felt.

The big-ticket measures include a $1,400 payment to every individual, a $400 per week additional unemployment payment until August 29th, and support for those struggling to pay home loan payments and rents. The most significant victory for the Administration is that the package is general in its support where the Republicans demanded that it be more targeted.

Last week’s jobless claims data showed a marked improvement and has shed an optimistic light on the NFP data that will be published this Friday. The data is almost certain to be positive which is the first battle in these uncertain times, but it still has the capacity to disappoint traders and investors.

A below 100k increase in new jobs will contribute to a slower than expected recovery while 200k+ will be seen as extremely positive. As ever, conservative expectations are likely to be right with the latest predictions between a 120k and 150k increase.

The dollar index surged on Friday to a high of 90.96 as the market’s view that the stimulus package was about to be passed became a reality. It closed at 90.96 and has begun the new week in positive territory.

Hard to figure what to tackle first

The EU Commission and the ECB face so many challenges at every stage of the expected recovery that it is hard to see where Ursula von der Leyen and Christine Lagarde will start.

Ms von der Leyen has kept a very low profile since the vaccine fiasco. Her defence appears to revolve around the old saying least said, soonest mended, but there are some long memories in several European Capitals.

There is a growing difference of opinion amongst members of the ECB’s Governing Council which is entirely understandable.

The Bundesbank President believes that the pace of the support is about right, and the Dutch and Austrian delegates agree with him. On the other hand, The Greek and Portuguese Central Bank Heads have called for PEPP to be increased and extreme prudence be exercised before any support measures are relaxed.

The ECB is expected to look past any growth in inflation going forward as it is expected to be temporary. That being said a sustained and continued fall in the value of the euro is going to be a double-edged sword. On the one hand, it will add to the competitiveness of EU exports, while it will do nothing for and in fact add to inflationary pressures.

Several analysts have highlighted the recent price action of the euro as pointing to a long-term target having been reached and a long, slow fall beginning which targets between 1.16 by year end.

Confidence data has been fairly supportive recently and this week is unlikely to buck the trend. Today’s release of German inflation data is expected to be unchanged at 1.6% and this will provide a good indication for the rest of the Union.

Services output is also expected to be unchanged as Brussels continues to grapple with London over Post-Brexit rules and regulations for financial services.

The euro was something of a mixed bag last week. It reached a high of 1.2243, close to its highest of the year before collapsing to close at 1.2065.

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.”