22 April 2020: Sterling falls as dollar dominates

Sterling falls as dollar dominates

22nd April: Highlights

  • Employment data too early to tell
  • Risk aversion fuels dollar as real global effect seen in oil price
  • Trust, the latest victim of Covid-19

Employment data significantly better than feared

On reflection, yesterday’s UK employment report was a little too early to yet show just how bad the jobless figures will be once the lockdown is lifted.

Employers taking advantage of the Government’s scheme to pay workers 80% of their wages up to a maximum £2.5k paper month may be using that facility just to keep going but once that is removed and the SMEs in particular have to survive without support the true effect will be seen.

Solvency is the single issue most employers face and just having a business to come back to following the pandemic is the most important goal.

There have been any number of statistics and estimates of just how bad the recession will be. The worst in 300 years is a popular headline but until the economy starts moving again no one can have any real idea.

It is obvious that the longer the lockdown continues, the worse the fallout will be. While wages are a significant part of cash flow other outgoings like rent, are also significant.

As the lockdown continues those companies who deal with the EU will look on with some trepidation as the EU slowly starts to return. Those EU firms whose supply chain includes UK businesses still in lockdown will be forced to look elsewhere for suppliers and once they have gone, they will be very hard to get back.

The pound fell to its lowest level for a couple of weeks yesterday as the dollar started to rally. It reached a low of 1.2247, closing at 1.2293. Concerns over the continued absence of Prime Minister Boris Johnson who remains in convalescence are beginning to drive analysts. The Government appears to be muddling through. Recent confusion over the availability of PPE equipment for front line workers is a prime example.

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Chinese influence to come to bear long-term

While the dollar reacts to the global effect of the pandemic and the risk appetite of the markets, the outlook for the domestic economy is beginning to create a heavy cloud facing the greenback.

The protests that have been seen recently from people concerned over their business’s survival have been a stark reminder of the concerns of business proprietors.

While the Fed. and Treasury have done more than was expected to keep the economy afloat, the pressure to reopen as their major trading partner, China, begins to emerge from its own lockdown is becoming more intense.

While China will quickly get back to full capacity despite pockets of second peaks emerging, the nascent agreements between the two nations allowing the U.S. access to various parts of the Chinese economy, in particular agriculture, could see the U.S. unable to fulfil their commitments leaving China free to look elsewhere.

The growing conspiracy theories about China’s involvement in the origination of Covid-19 will grow and the comments from Government officials, led by President Trump are hardly conducive to ongoing trade talks.

The tentative May1st data for the reopening of the economy has been questioned by several State Governors who deny the President’s authority to unilaterally declare the lifting of the lock down. As with several issues in the U.S., this has become a political football with Trump calling out mainly Democrat run States encouraging their residents to protest.

Yesterday, the dollar index consolidated above the 100 level as risk appetite was crushed by the continuing collapse of the oil price. WTI crude made an overnight low of $3.45 per barrel. The dollar index reached a high of 100.43 yesterday, closing at 100.21.

Uneven recovery to hit overall outlook

Just as the spread of Covid-19 was different across most nations of the Eurozone, the recovery will have a similar appearance. As divisions and mistrust continue to afflict the Union, a consolidated strategy to combat the economic effect looks as far away as ever.

While the Frugal Five (Germany, The Netherlands, Belgium Austria and Finland) start to lift the restrictions placed upon their people Italy and Spain continue to become more likely to go it alone with their recovery efforts just as they were in coping with the pandemic.

Yesterday, the effect on one of the nations that was more successful in limiting the spread of the virus, Germany, was highlighted. The ZEW index of current sentiment plunged to a low of -91.5 from -43.1 previously while future expectations surprisingly rose. There is only one explanation for any optimism over the future and that is that it must be better than it is currently.

The number was still poor but in comparison to last month where little was known about how successful Germany would be in combating Covid-19 the entire nation must be relieved that the death toll hasn’t been considerably higher.

Italian Premier Giuseppe Conte said yesterday that Italy would start to consider the further lifting of restrictions that have so far only been seen as tentative.

It is accepted that the coming recession will be devastating across the entire region, but certain areas will be worse hit. It won’t be until the recovery is well under way that we will know just how devastating. Speculation about the future of the Union remains but, again, it will be some time before there is room for such discussions as the recovery slowly starts.

Yesterday, the euro reacted to a strengthening dollar. It fell to a low of 1.0816, closing at 1.0858, just three pips lower on the day.

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.”