20 July 2021: Haskel wants to delay tapering

Haskel wants to delay tapering

Morning mid-market rates – The majors

20th July: Highlights

  • Risks skewed towards tighter monetary policy hitting recovery
  • Concerns are growing that Biden’s infrastructure plans will fuel inflation
  • Germany decoupling from the Eurozone?

Two headwinds face the economy in H2

Following last week’s inflation data that showed prices are still rising rapidly, monetary Policy Committee Member Jonathan Haskel was the first to put his head above the parapet.

Haskel said he sees two major issues that could derail the recovery in the coming weeks/months.

First would be the bank withdrawing monetary support by slowing the rate at which it is purchasing assets or ending the programme completely and, second, the continued rise in cases of Covid-19 driven by the highly transmissible Delta Variant.

Two of Jonathan Haskel’s colleagues on the MPC have called for tapering to begin sooner rather than later. Gertjan Vlieghe and Michael Saunders, both considered hawks, believe that the bank should be preparing the ground for a tightening.

One wild card emerged yesterday. Catherine Mann, the newest member of the MPC. She commented that negative rates are often deployed too late to help economies, and she would never say never about taking rates into negative territory.

As with many of these issues, the answer probably lies somewhere in the middle. It is clearly too early monetary support to be withdrawn as the Chancellor, from his bed presumably, tries to withdraw fiscal plans. The other side of the same coin is the rate at which inflation is rising.

There are so many imponderables that contribute to this data that the Bank of England has no choice but to be reactive to the numbers.

Yesterday didn’t feel like the day we have been waiting to arrive for sixteen months. With the Government close to disarray over its plans for the reopening, which seem to change with uncanny regularity, and close to 40k new infections, it seems like there is still a long way to go.

Sterling has begun the week under pressure versus both the dollar and the single currency.

Waning risk appetite was blamed, which means that analysts were unable to fathom a pertinent reason. The breakthrough for the dollar index climbing above 92.80 was a significant trigger for the fall, while the inability of the pound to break resistance against the euro meant that profit taking began.

Versus the dollar, the pound fell to 1.3662 finishing close to that level. Against the euro, it fell to its lowest level since late May. It reached 1.1571 and closed at 1.1591.

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92.80 cracking under the weight of dollar buyers

Finally, the dollar index managed to break above the 92.80 level, which has proved to be a significant obstacle over the past few weeks.

The primary reasons for the initial breakthrough were concerns about the spread of the Delta Variant of Coronavirus, together with the possibility of further variants emerging as the Northern Hemisphere enters the Autumn/winter period.

The marker performed something of a delayed reaction to retail sales data for June which was released on Friday., and the recovery continues to gather pace.

The dollar index finally managed to break the dm that had been forming around resistance at 92.80 and a combination of drivers took it through.

The concerns over the Delta Variant hit risk appetite, which drove the euro and Sterling lower. The expectation that despite a possible outsider in the UK joining the party, the U.S. is still favourite to begin the tapering of asset purchase first provided a boost to the Greenback, while uncertainty surrounds what the ECB will announce this week.

While President Biden continues to publicly eschew higher inflation, he is still trying to drive through his $3.1 trillion stimulus package, which will clearly have an effect on inflation.

Biden has become something of a mini-Powell as he tries to find reasons for rising inflation. Expressions like you can’t expect to flick the switch and nothing happens. This is a reference to the fact that demand has risen at a rate far outstripping the availability of supply, and several issues like the semiconductor shortage have contributed to disparities.

The dollar index looks set to continue to make ground, at least in the short term. Traders may look to take profit in advance of Thursday’s ECB meeting, but for now the dollar is the only game in town.

Yesterday, it rose to a high of 93.03. Weak longs bailing out took it back to close at 92.86.

ECB Meeting to bring a sea-change?

In Spite of yesterday’s rally in the dollar index which pushed the euro to a low not seen since early in Q2, the single currency looks set to take the wheel, and drive the market. The only question is which way will it go.

There is significant doubt about what Christine Lagarde will announce following Thursday’s ECB Monetary Policy meeting. One thing is certain. Nothing will happen immediately, and the new deal that Lagarde will introduce to replace the current round of Quantitative easing will be no more than advance guidance.

Inflation is an issue that is affecting Central banks globally, but no Central bank will be more concerned than the ECB and the more hawkish members of the Governing Council.

The Frugal five; Germany, Belgium, The Netherlands, Austria, and Denmark will strive to protect their investment in the financial viability of the project, since they see no future in a group that mirrors the weakest rather than the strongest of the economies.

Indeed, Germany is coming close to going it alone, almost glorying in the pace of its own recovery while several oyster members of the Union suffer.

The weekend’s natural disaster which overtook the north-east of the region will have driven those countries closer together.

The ECB is favoured by a slightly fortuitous position in regard to inflation. So far, although there has been a rise, it hasn’t been a straight line as has been seen in the UK and even more so in the U.S.

There seems to be something of a natural break around the 2% level, which gives the ECB a certain amount of respite. No one doubts that inflation will reach the high 2’s or even exceed 3%, but that won’t happen until Autumn and the ECB won’t then be out of line.

All sides of the ECB, hawks, doves, and moderates will have to hold their nerve and allow the current policies to work while the new arrangements are digested by the market.

The euro was still in the grip of the dollar index yesterday, it fell to a low of 1.1763, but it scrambled back to close just above 1.18.

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.”