22 January 2021: Q1 an economic write-off

Q1 an economic write-off

22nd January: Highlights

  • Lockdown likely to remain through Q1
  • Dollar stumbles as stimulus hopes grow
  • ECB holds off for now

Too early to consider lifting restrictions

To paraphrase the words of King Henry II, will no one rid us of this turbulent Union. The arguments go on but this time it is the UK that is holding the cards.

London is refusing to recognise the EU’s Ambassador to the UK since the EU is not a Sovereign State as defined by the UN, so its representative does not have the status to present his credentials to the Queen.

The fact that141 other nations accept the sovereignty of the EU is neither here nor there. A neutral can see both points of view; it is really simply a matter of scoring points and should be resolved over time.

Post Brexit, the UK will take some time to find its feet in trading both with Europe under its new terms and with the wider global market. One positive following the Brexit deal has seen Japanese car manufacturer Nissan commit to the UK. This secures 6k direct jobs and a further 70k in the supply chain.

Progress has been made in trade negotiations with several major economies, but it is how the new U.S. President deals with a new trade deal that is vital to the UK’s short-term prospects.

The fact that, in theory at least, President Biden will attend the G7 meeting that will be held in the UK between June 11th and 13th could be significant to the agreement.

Chancellor Rishi Sunak is already under pressure to extend the Government’s furlough scheme even further when he presents his Budget on March 3rd. This is another indicator that both the lockdown and the current restrictions will last longer than had been expected.

Yesterday, both Home Secretary Priti Patel and the Prime Minister were insistent that the time has not yet come to even discuss the removal of restrictions let alone set any kind of timetable.

Meanwhile, the threat of a further cut in interest rates, possibly into negative territory hangs over the economy. This will hit both banks and savers and won’t be entered into lightly by the Bank of England.

As mentioned before, there is a distinct difference of opinion between BoE officials and the independent members of the MPC. The minutes of the next meeting will make interesting reading since no matter if there is a broad outline agreement no action will be taken yet.

The pound rallied yesterday against a slightly weaker dollar. It broke and closed above the 1.3720 resistance, reaching a high of 1.3746, closing at 1.3734.

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Construction sector gaining impetus

Joe Biden marked his first full day in office by reversing several policies that his predecessor had put in place.

Biden recommitted the U.S. to the Paris Climate Accord, confirmed that the U.S. would remain a member and significant benefactor of the WHO and withdrew emergency funding for the border wall with Mexico.

This means that one of Donald Trump’s major immigration initiatives will stand as a monument to his failed attempt to isolate the country.

The most important new initiative that Biden is expected to introduce will be around employment. The release of weekly jobless claims data showed that in the latest period, 900k new claims were made, continuing claims are at 5000k and the average new claims over the past four weeks remains stubbornly high at 848k.

Biden will have the benefit from Janet Yellen’s experience, having been exposed to rising unemployment when she was at the Federal Reserve, while her successor Jerome Powell shares her view that supporting the economy is the single, possibly only, initiative that matters in the short term.

Next week’s FOMC meeting will be viewed in the context of protecting and stimulating growth and a strong commitment to further expansion of the Bank’s balance sheet is expected.

The first test of Bidens foreign policy will be to deal with the laggard behaviour of China in its commitment to phase one of the trade deal between the two countries.

While the potential for an all-out trade war that seemed to loom like a dark cloud over the previous administration has receded, Biden will need to show his teeth in dealing with Beijing seemingly taking advantage of the U.S. looking the other way.

The potential for a further massive stimulus package has improved risk appetite and this for now has led to a halt to the dollar’s recent correction. Yesterday the dollar index fell to a low of 90.05, closing at 90.08. There is continued buying interest around this level as the potential for a significant rally from here still exists.

ECB’s 2020 outlook still just about valid

Yesterday’s ECB meeting ended with the normal statement from Christine Lagarde that the Bank will continue to be watchful of economic developments and committed to further stimulus should that be deemed necessary. She went on to say that the Pandemic remains unpredictable and poses significant risks to the economy.

Doubts remain over the way in which the economy will develop this year as Lagarde confirmed that there was a contraction in GDP in Q4. That means a double dip recession is now fairly certain. Several Eurozone members have extended their lockdowns well into next month.

The most recent forecasts for the region are, according to Lagarde, still valid. The Central Bank predicted 3.9% growth for 2021 and 2.1% for 2022. This is an admission that even at the end of next year, the economy still won’t have reached the level it was at pre-Coronavirus.

The region is facing both supply and logistical issues with its vaccination programmes.

In typical EU fashion the roles of supply and distribution of the vaccine have been shared, with supply the responsibility of the EU Commission and distribution and delivery assigned to individual member Governments.

This means that countries across the entire region from Spain to Latvia are unable to commit to programmes as they are unsure of when they will receive a reliable supply.

Unemployment continues to rise across the entire region, and this is another issue which is dealt with by individual nations. This puts pressure on Government borrowings and is another indicator that the Eurozone is doomed to fail long-term if it is unable to commit to a Fiscal Union.

The euro rallied yesterday but stayed within its recent range. It reached a high of 1.2173, closing at 1.2168.

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.”