Pandemic leads to divergence between pound and economy

Over the period since Brexit negotiations started, the pound was considered as too risky a proposition for long-term investment. The long-running saga of Opposition attempts to scupper the efforts of the May Government to negotiate a deal meant that the economy and therefore the currency were continually under pressure.

It cannot be overestimated the importance placed by financial markets upon stable Government. The victory of the Johnson Government and the 80+ seat majority it gained means that now, matter the economic fallout from Brexit, Covid-19 or any other so far unseen event there will be consistency of policy and reaction for the next four plus years.

Sterling underperformed in the years leading up to last December’s election, the opposite is now true, and it is beginning to trade closer to its fair value, against the dollar in particular. Versus the euro, the pound has found a base and while the single currency’s significant representation in the dollar index provides it with a degree of support, Sterling is easily holding its own.

The major short to medium-term issue that is causing the most concern to the Government is employment in the wake of the furlough scheme. The concerns that were voiced at the start of lockdown are being realized as the country begins to emerge.

High Street retail and hospitality have seen the two hardest hit sectors. Both have received the support of various Government schemes, but it is no coincidence that brick and mortar retail was struggling before Covid-19 and this could be the start of a long drawn out demise. It is possibly premature and a little glib to say that this is the natural order since the younger generation find online shopping easier in every way but urban decay is going to be the major long term topic that has not so far been considered.

The pound continues to hold its own, rising to a high of 1.3224 yesterday, recouping its losses from the previous day. It closed at 1.3214.

Versus the euro, it also rose yesterday, reaching 1.1150. There appears to be resistance around 1.1180 but should it be able to break that level a significant break higher could be seen, targeting the high 1.14’s.

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Kudlow remains convinced recovery is very strong

The depends who you ask saga continues when it comes to the relative strength of the recovery of the U.S. economy from the worst ravages of the Pandemic.

Larry Kudlow seems to have had a change of job title recently. He has switched from Chief Economic Advisor to Chief Cheerleader.

On a day when the data for jobless claims showed that initial claims rose again (to over a million) he was still extolling the pace of the recovery and claiming that it is well on track.

During the Trump Presidency one consistent theme has been his claim that other countries are holding their currency at artificially low levels to boost trade and inward investment.

The opposite is now true and although the fall in the value of the dollar is by no means artificial, inward investment has seen rising as funds pour into equity markets, while it is too early to see the effect it has had on trade.

One of the less obvious areas where the dollar has depreciated is versus the Chinese Yuan. Since June, the dollar has fallen from a high close to 7.18 to a low yesterday of 6.90. The significance of this fall on the cost of trade cannot be overestimated.

This may be part of an unseen Administration ploy to both play the Chinese at their own game and make domestic manufacturing more attractive. There is a long way to go but every journey starts with a single step.

Of course, if Joe Biden and the Democratic Party get their way, the entire Trump Presidency will be consigned to history. The latest polls show Biden to be ahead and Trump continues to be deserted by his most significant support groups from 4 years ago.

The dollar index continues to struggle in thin markets. Yesterday it fell back to a low of 92.72 but perhaps significantly didn’t lose all its gains from the previous day. It closed at 92.75.

Erosion of savings to affect consumer spending

There is a concern among analysts that the level of unemployment being seen in the Eurozone is lagging behind other factors and the Autumn may see a significant rise.

The reasons for this range from poor reporting to personal decisions not to claim benefits, but this is leading to another issue. Personal savings rates across the region have fallen to their lowest level since the 90’s and may hamper the recovery.

Since there has been no cheque in the post, or a copy of the schemes from other countries, people’s savings have been used to pay for essentials like power, water, and food.

As the economy recovers, it is likely that those savings will be the first thing to be replenished which means that growing by means of retail sales will take longer if it happens at all.

Having seen no end of turmoil over the past several decades it is an issue that will be particular to Europe.

The Pandemic Relief Scheme will go some way to providing benefit but that is limited by both amount and longevity and it could easily run out before its true benefit has been realized.

According to ECB Chief Economist Philip Lance, demand is being dampened by rises in cases of Covid-19 in several of the larger economies. Germany saw its largest rise in new cases since April this week, while Spain and Italy both saw significant increases.

The Eurozone was the first G7 economy to fall into recession having seen a contraction of 3.6% in Q1. This does not mean it will be the first to return to growth and the prospect of contraction in the third and fourth quarters looks real.

The single currency continues to benefit from dollar weakness. Yesterday it climbed back to a high of 1.1868, closing at 1.1860, but it still fails to inspire traders to buy on its own merits.