Sterling recovery on hold
20th April: Highlights
- Lockdown extension effect on economy unquantifiable
- Dollar’s fate tied to several imponderables
- Government debt spiralling out of control
6/10 businesses could disappear
Tomorrow, the UK’s employment report will be released. It will undoubtedly show a large increase in the number of unemployed. Last month, there were 17.3k new claims for benefit, it is anyone’s guess what this month will show. It should be remembered that the first unemployment claims data in the U.S. was woefully underestimated as were the non-farm payrolls.
Following on from that, will be inflation data which is likely to have been affected by the fall in oil prices which has led close to a 20% fall in petrol prices at the pump. Of course, the lack of sales will also affect the price.
Manufacturing and services activity are due for release on Thursday. Having already fallen in March., the April preliminary data won’t come as a surprise since it is expected to be uniformly appalling.
Last week. the Government announced that the Covid-19 lockdown would be extended for a further three weeks at least, while stories in the weekend press about schools reopening have been denied.
The extension to the lockdown conflicts with various nations in Europe are beginning to lift restrictions. This may point to either an over-cautious attitude or be confirmation that the UK is going to be the worst affected nation in Europe.
Last week, the pound steadied a little but, as with other major currencies, remained under the influence of the dollar. It traded between 1.2407 and 1.2647. It has recovered well versus the euro, recovering 7% of its reticent fall. It traded between 1.1373 and 1.1518. It closed at 1.1495.
Trump’s plans economically sound, medically risky
Extraordinarily, President Trump has used social media to encourage the protesters despite going against Federal policy which he signed off on.
Jobless claims averaged 5.5 million over the past four weeks and it is clear that Trump does not want this to increase too much further given his re-election campaign is likely to return in the short or medium term.
With the April employment report on the horizon calls for a lifting of restrictions will not only remain but in all probability become more strident. It is hard to understand whether the May1st deadline that has been bandied around is close to becoming policy or remains little more than wishful thinking.
Since the U.S., has experienced the largest number of fatalities globally, the idea of lifting restrictions will need to be handled very carefully.
President Trump has also been on the warpath towards China, blaming America’s largest trading partner of anything from manufacturing the virus in a Laboratory to lying about fatalities with failure to allow access to WHO officials somewhere in the middle.
This week will also see some major data releases in the U.S. Not only will weekly jobless claims again be significant, but home sales, activity indexes and durable goods orders will be released.
Last week the dollar was reactive to risk appetite. The dollar index traded between 100.30 and 98.30, closing at 99.71, just twenty pips higher on the week.
Who holds the debt? Will they forgive or extend?
Brussels allowed nations to use their own endeavours to fund their individual responses since there was no effort to coordinate a response, a fact that was acknowledged by EU Commission President Ursula von der Leyen last week.
Despite the fact that the Netherlands is the most vocal of those against the creation of Coronabonds guaranteed by the EU jointly, it is becoming fairly obvious that it is Germany that is pulling the strings.
The German doctrine, cemented into its constitution that they cannot run a budget deficit of more than 0.35% of GDP, means they are virtually looking down on the rest of the EU from an Ivory Tower.
It is yet to be determined what they will need to do to fund their coming recession, but they will not help the likes of Spain and Italy despite a moral duty enshrined in the EU’s Mandate to do so.
They will offer many kinds of assistance other than financial as they try to steer the EU ship away from an approaching iceberg.
As French President Emmanuel Macron said last week, the EU is approaching a crossroads (as well as an iceberg) where it will need to confirm solidarity in order for the post-war era of peace to continue.
While many will consider that Spain and/or Italy will look to break free of Brussels shackles, it may be (as has been rumoured before) Germany that decides enough is enough. It is all very well being shackled to these highly indebted nations in good times, but their inability to learn financial discipline may just force Germany’s hand.
Last week, the single currency traded between 1.0991 and 1.0812, closing at 1.0869 as the .10 level remains elusive.
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.”