UK lockdown to hit economy
21st April: Highlights
- Sterling fades as lockdown set to continue
- Oil rout lifts dollar
- Where Germany leads
Lack of leadership becoming critical
The effect of the extended lockdown to at least the second week of May means that whatever happens after that, the UK will be behind the curve in catching up with other G7 nations.
It is becoming clear that the lack of a definitive leader is beginning to have an effect on the confidence of the country in a series of deputies who, it is well known, are unable to make decisions. This may well lead to a feeling of dithering where strong leadership is necessary. Analysts are beginning to consider whether the lockdown can even be partially lifted until Johnson is safely back at the helm.
Later this morning, the employment report will be released. It is a little less transparent than its U.S. counterpart with the monthly rise in the claimant being the most significant and easily understood piece of data.
It is hard to put a number on how many new claimants there will be but under 150k may be seen as a good result.
The first few pieces of data that will have been affected by the lockdown will bring about the most vigorous reaction as they will set a benchmark going forward.
The market chose to pretty much mark time yesterday as it mulled over the likely scenarios that will play out in the next few weeks. The pound traded in roughly the same range for the third session running. It fell to a low of 1.2416, closing at 1.2449
Market awaits crucial data
While some of the reasons for the collapse of the price were technical, a glut of supply and the slowdown due to the Covid-19 pandemic were major factors.
Since there is a glut of oil in the marketplace now, storage prices have been rising given a lack of capacity. This has led to tankers being hired to use as makeshift storage which means that the cost of storage outweighs the price at which the oil can be sold.
The dollar has benefitted from a fall in risk appetite as those currencies whose direction is directly correlated to commodity prices have fallen.
The dollar index continues to gyrate around the 100 level as a multitude of factors influence its direction. The U.S. has done more than any other nation to support its economy and the pressure to lift the lockdown in several States is leading to fears of a second peak. This would delay any recovery while jobless claims continue to grow at an alarming rate.
The dollar index traded between 100.07 and 99.65 yesterday, closing at 99.96.
As data released shows the effect of the lockdown on every economy, volatility is likely to increase later in the week as the market digests the various indicators that will be published.
Huge unemployment risk beginning
Talks will continue this week against a backdrop of significantly weaker data.
Later this morning, Germany will release the ZEW index of business sentiment which is certain to have fallen even further after a weak number in March. Individual nations data is becoming almost on a par with collective numbers as each nation continues, for now, to go its own way.
Yesterday, Germany which has been the most successful nation in Europe in combating fatalities from the virus allowed smaller shops to reopen. This follows Belgium, which has the highest fatality rate per million of population in Europe, which allowed larger shops to open at the weekend. Despite the lifting of certain restrictions, the strict rules on social distancing and other regulations remain in place which mean that any recovery driven by an increase in activity will be slow and long drawn out.
The euro remains affected by a lack of confidence, giving the appearance that it is teetering on the edge of a collapse which may be driven by any lack of progress on a joint effort to combat the economic downturn this week.
Yesterday, the euro fell to a low of 1.0841, closing at 1.0861 as traders await progress from the ongoing talks and the data being released this week.
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.”