20 July 2020: Austerity not an option

Austerity not an option

20th July: Highlights

  • The UK needs to spend even more to stave off recession
  • IMF sees Q2 contraction at 37% YoY
  • EU Summit remains deadlocked despite concession to Rutte

Tax rises not spending cuts to be Sunak’s way

Although there is still an option for Chancellor Rishi Sunak to either cut public spending or raise taxes to pay for the support he has provided during the Covid-19 pandemic, it is becoming more and more certain he will opt for tax rises.

This is not a traditionally Conservative way of raising funds, it was made clear by Boris Johnson at last year’s election and Sunak’s action at the time of the Budget in March that austerity in the UK was over and a more expansive form of Capitalism will be this Governments watchword.

The clock is ticking for Sunak to make his mind up and he has until the end of Q3 to deliver. With estimates for the total unemployed rising seemingly daily and a second spike of the virus a real possibility as winter approaches, a strategy that incorporates help for those who most need it coupled with a degree of balancing the books will be necessary.

It may be that the country’s finances will look more like those of a Socialist Government for many years to come, probably for the life of this entire Parliament.

The UK has shown itself willing to stand up to the might of the EU in fighting for what it believes to be its rights over Brexit. Last week it picked a fight with Russia of cyber terrorism and the row with China over human rights and Huawei is escalating.

The country is in a precarious position where on the one hand it needs to forge a path in the world as an independent trading nation but also needs to show that it will not be bullied by the rising Superpowers.

The pound traded in a fairly narrow range versus the dollar last week. It made attempts to break both ends of the range trading between 1.2480 and 1.2666 but the pull of the 1.25 level was too strong.

Following a couple of weeks of little data to influence it, this week will be similar although house prices are expected to provide something of a lift while it is hard to predict what retail sales data, released on Friday, will show.

While the pandemic remains the most significant driver for the FX market globally, Sterling is likely to remain within its most recent range, reactive to what is happening in both the U.S. and across the Channel. There is insufficient drive amongst traders to change their long-term view on the UK economy which has two major negative influences hanging over it while a continued correction for the dollar provides a degree of support.

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Badly handled lifting of lockdown creates potential disaster

The U.S. economy is under almost constant attack over the continued rise in both confirmed cases of Covid-19 and fatalities from the pandemic.

Although it is hard to either understand President Trump’s overall strategy for dealing with a seeming second wave starting without any respite from the first, it is now obvious when comparing the U.S. data with that from other major nations that he got the strategy for lifting the lockdown spectacularly wrong.

The seeming disregard for the data when looked at in conjunction with the almost total disregard for the science, unless it conforms with his own often warped view, means that those in charge of the economy will be faced with an almost impossible task in keeping it afloat.

The Fed will almost certainly need to act at its next meeting which takes place next week. While the FOMC only has three meetings left this year after next week, they have shown themselves willing to make decisions in need between meeting if the need arises. Fed Chairman Jerome Powell will need to become proactive as his time for contemplation of the issues facing the economy comes to an end.

The economic recovery from the pandemic has been labelled with several letters of the alphabet during the crisis with V-shaped and U-shaped recoveries being mooted but the latest prediction for the U.S. economy is for a W-shaped recovery.

While this is more a reaction to what has already gone on it reflects what is happening in the employment market well. It remains to be seen what Congress will agree upon for the support that is needed going forward but Initial and ongoing jobless claims continue to disappoint while the NFP has become almost totally unpredictable.

The next two or three weeks with an FOMC and the July jobless figures may give a clearer indication for the dollar in the short term, but while it is driven by global risk appetite it may be much longer before a clear trend emerges.

Last week., the index traded between 96.70 and 95.77 without any clear pattern. It closed at 96.00.

It is becoming more difficult to see the EU surviving

The population of the EU is close to 450 million and every one of those people deserves to be represented by a decisive and protective legislature which provides them with security of employment, economic growth and a healthy and improving lifestyle.

Unfortunately, what they are getting is nothing but dithering, bickering, mistrust, and a lack of cooperation.

The EU Heads of Government Summit which started on Friday never really held up too much of reaching an agreement on the Pandemic Relief Fund but it still took until last night, following a series of small meetings between the like-minded to realize they are too far apart to agree.

The Eur 500 billion fund proposed by France and Germany had been expanded to Eur 750 billion by the hopeful southern states only to be cut to Eur 350 billion, possibly rising, in need, to Eur 400 billion driven by the frugal states of the North.

The waters have been muddied further by the opportunistic addition of various Eastern states to include respect for nations individual laws into any agreement.

As one diplomat was reported to have put it last evening, they will get there but it will take some considerable time. Even that statement seems very optimistic this morning.

The ability to provide a relief fund to the most stricken nation has developed into a study on the viability of the entire EU project. Individual nations acted with speed, single -mindedness and no small degree of success despite the devastation the pandemic caused, particularly in Spain and Italy, but as a group the mistrust and what we have we hold attitude displayed by many bubbles to the surface.

The issues over EU borrowing and state guarantees have been known (and avoided) for several years with what appeared to be a hope that nothing would disturb the equilibrium considered to be EU Commission policy.

While the pandemic has been unexpected, planning for crises affecting such a huge group has been pitiful and the retreat between national borders could be a signal of what is to come.

The euro followed other major currencies in trading a narrow range last week. It found the atmosphere above 1.14 versus the dollar a little thin as traders found little reason for confidence but the unpredictability of the dollar protected the downside. It reached a high of 1.1452 but fell back to close at 1.1428.

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.”