22 December 2020: Sterling suffers as borders close

Sterling suffers as borders close

22nd December: Highlights

  • The shape of things to come as Sterling slumps
  • Support package better than nothing?
  • No new fiscal support until H2 ‘21?

Hopes of a solution to freight issues remain slim

Having only recently celebrated the anniversary of his resounding election victory, UK Prime Minister Boris Johnson could be forgiven for feeling that winning the election was little more than a poison chalice.

There is no question that facing an eighty plus seat deficit in Parliament has allowed Opposition Parties do little more than snipe at every turn and criticize the mostly practical steps taken by the Government to deal with two unprecedented potential national disasters.

Brexit was never going to be easy. The EU sees the UK’s departure as an insult, a vote against its more Federal ambitions and, of course, a blow to its finances. Johnson has mostly stood by what he promised to do in his election manifesto although the time allowed by the transition period has mostly been wasted.

Although fishing is a tiny part of the UK economy, it represents a symbolic stand to protect the sovereignty of the nation, land, and sea.

The onset of the Coronavirus would without doubt have tested any Government as it has morphed into an economic and social as well as a medical crisis. It has served to highlight the fact that Government Ministers are on the whole ill-equipped to make difficult decisions when provided with alternatives, often due to a lack of experience over the Portfolio they manage.

There is a notable example in what Chancellor Rishi Sunak, new to Government has achieved in his role compared to Health Secretary Matt Hancock.

When analysed in the cold light of day, the calls made by the Government over the Holiday Season were almost impossible to get right. This is particularly true given the timing of the evolution of a new strain of the virus.

Going forward, there will be little respite for Johnson or his Ministers. Christmas is all but cancelled and every effort appears to have been made to open up the border between the UK and France to get freight moving again.

Although Johnson hailed UK laboratories as being at the forefront of genome sequencing, thus allowing it to recognise the mutation first, that has also backfired leading to the entire country becoming isolated from the rest of the world.

Far from being a gentle winding down, the final two weeks of the year are likely to be both frantic and frenetic with financial markets apparently poised to desert the currency.

Yesterday, the pound tumbled versus the euro, and began what appears to be its long-awaited correction versus the dollar. Against the single currency, it fell to a low of 1.0841, clonsing at 1.0998. Against the dollar it was a similar story, a low of 1.3188, followed by a significant rebound to close 1.3453.

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How far can the funds stretch?

The good news is that Congress has finally managed to agree a package of support measures to provide aid to individuals and businesses affected by the Coronavirus Pandemic.

The bad news comes in two parts. First, the package has taken an inordinate amount of time to be agreed, making it too late for many and second, the funds allocated are expected to stretch far further than had originally been imagined.

A portion of the $900 billion fund will be allocated to the rollout and distribution of the vaccine, an expense that wasn’t even envisaged when the talks were at their height.

Outgoing Treasury Secretary Steve Mnuchin said yesterday that the Administration was pleased and relieved that the deal was able to be done in time. He went on to say that the direct checks will be mailed out next week. With Christmas Day this Friday, his idea of in time may differ from that of the recipients of the checks.

The final quid quo pro for the deal to be done was to clip the wings of the Federal Reserve by limiting its borrowing powers to ensure that it remains separate from commerce.

While on the surface the separation of a Federal Institution from its power to support business may be seen as sensible, Democrats see it as the thin end of the wedge in the Central Bank’s involvement in fiscal support.

As was mentioned yesterday, the market became a little confused about the influence of the support package. The dollar index rallied, then it fell back, then rallied as traders and investors took turns to express their view.

It traded between 91.02 and 90.02, closing at 90.07.

The Eurozone suffers from the same issue as the U.S.

The delay in provision of a federal aid package to be distributed across the entire EU is creating a similar situation in the Eurozone to what has been experienced in Washington.

Using the plight of those who have been badly affected by the onslaught of the Pandemic, and now face infections with a new strain, is both despicable yet natural.

While Poland and Hungary would never threaten to leave the EU over the issue of EU interference in what they both consider to be domestic issues, they are prepared to make their presence felt.

Forcing negotiation through these means may be marginally more palatable than simply political points scoring as has been seen in the U.S., but nevertheless the suffering across the entire economy appears to be no closer to resolution.

There are rumours circulating that it will be the second half of next year before the funding is made available.

That will place an inordinate strain on the ECB and cause any talk of a fiscal union to be kicked down the road.

Brussels is currently being accused of being responsible for limiting the economic freedom of its members which is almost the exact opposite of the reason most nations joined in the first place. The incredibly large and cumbersome bureaucratic process differs from the methods most members have been used to.

The financial crises of the past ten to twelve years have hampered the EU in moving in the direction it desires and while the Pandemic has delayed the evolution it is unlikely to lead to the collapse of the Union.

Given the current issues caused by the lockdown restrictions and Brexit, the EU faces a longer recovery despite short term confidence indicators showing a marginal improvement. The question remains: does an improvement which remains in negative territory provide any cause for hope?

Yesterday, the euro was driven by the gyrations of the dollar index. It traded between 1.2252 and 1.2129 recovering to close at 1.2232.

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.”