20 April 2021: Sterling reaching for 1.4000

Sterling reaching for 1.4000

20th April: Highlights

  • Businesses see longer recovery
  • Dollar index testing lows
  • More of the same despite euro rally

Rally may be the final hurrah

Unemployment data is due for release today in the UK. Rising jobless numbers are one of the unwelcome outcomes of the economic effect of the Pandemic.

Many businesses, particularly in the retail and hospitality sectors have seen cash reserves dwindle during the lockdowns and have now simply become unviable. Added to this, just what the new normal will look like is bringing its own level of uncertainty.

Rishi Sunak the Chancellor of the Exchequer was rightly praised for both the speed and efficacy of his plans to support the economy over the entirety of the Pandemic.

However, as his furlough relief and other measures come to an end, he must now put in place schemes to not only support but also stimulate the marketplace.

Retaining schemes, skills courses and fiscal benefits to business must be at the top of his list of priorities as the furlough scheme runs out.

Tax benefits for firms making new hires particularly of young people as apprentices are necessary if the current 18 to 25 years old are not to become another lost generation mirroring the economic downturns of the seventies and early eighties.

As the economy recovers from the Pandemic with the reopening of several areas last week, it will become more obvious just which sectors require targeted support. Those pubs, bars, and restaurants without outside space have been disadvantaged by the staged reopening and many will never open their doors again.

This will add a flow of new jobless over the coming months and will be a drain on the Treasury as it lowers tax receipts and raises benefit claims.

The pound saw a significant rally yesterday versus the dollar as the greenback continued to weaken. It made a high of 1.3992 and has traded overnight just above the 1.40 level.

It has also recovered well versus the euro as the comparison between the opening of lockdowns and the falling infection rates clearly favours a faster recovery in the UK. It made a high of 1.1644, closing at 1.1620.

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Dovish Fed driving index to new lows

The financial markets have clearly decided to take the Fed at its word regarding its continued support for the economy via historically low interest rates and dovish monetary policy.

Fiscal support will also continue to be added by the Treasury meaning that the economy will grow significantly this year although rising inflation will remain a major concern.

The Fed has tried to quell fears of higher inflation acknowledging recently that the average rate is expected to climb to around 2.5% and remain at that level for a year.

In normal circumstances that would be a serious gamble but the current level of support the economy needs is unprecedented as are the measures being taken.

The continued insistence that the Central Bank has the situation under control and has tools to deal with rising inflation is driving the dollar lower and this will add to rise in inflation.

The Treasury has questioned the motives of other countries, China and Japan in particular, who have in the past adopted policies designed to weaken their currency or haven’t baulked at direct intervention. While this is not the sole intention of current monetary policy its effect on trade is a welcome side effect.

The continued use of risk-on/risk-off as a reason for the dollar’s fluctuations is unduly simplistic as it fails to take note of the underlying growth of the economy by simply highlighting the external influences of the dollar being the world’s reserve currency.

At some point the comparison between the time it has taken for the U.S. economy to reach its pre-pandemic level compared to the Eurozone, whose currency makes up a significant part of the index, where that may not even be reached this year, will be made.

The eventual tightening of monetary policy will happen sooner in the U.S. even if official rates don’t rise for at least eighteen months.

The dollar index fell precipitously yesterday, making a low of 91.03 and closing at 91.09. Overnight, it has so far (5.00 BST) threatened significant support at 90.80 making a low of 90.88.

Inflation to be curbed but for how long?

The ECB meeting this week will, behind closed doors, rejoice at the dampening effect on inflation of the current strength of the single currency.

This will mean that there is one less thing for the Central Bank to worry about and will, just for a short time, mean that the stronger nations of the North may not be so concerned about the levels of borrowing being seen and the continued level of support being offered through quantitative easing.

As things stand, the EU is financing the excessive levels of borrowing deemed necessary by countries like Italy by being virtually the only buyer of its bonds.

Current low interest rates mean that servicing this level of debt but at some point, rates will begin to increase in what has become an artificial market which doesn’t necessarily reflect risk.

At some point a suggestion is going to be made that the purchases are made either perpetual or forgiven. Either way it will put severe strain on the entire financial system. However, it may tie the Union into a far tighter knit community and hasten the more Federal fiscal system that many desire.

This week’s ECB meeting is unlikely to do anything more than continue its mantra about being ready to act and having the necessary tools at its disposal.

It may even pronounce itself satisfied with the progress that has been made in the rollout of the vaccination programme despite continued lockdowns.

The level of confidence being shown by investors, businesses and the consumer remains relatively high but has weakened a little recently.

The single currency made a spectacular start to the week, breaking through the 1.20 level versus the dollar and reaching a high of 1.2048.

Overbought conditions now exist, and it may take a correction back to around 1.1980 before an attempt at the 1.2080 resistance can be attempted, although momentum certainly favours a stronger euro.

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.”