22 July 2020: Sterling testing recent highs

Sterling testing recent highs

22nd July: Highlights

  • Sunak facing unpopular choices
  • Double dip becoming a real possibility
  • Draghi II the sequel about to start

Traders looking past growing economic fears

The pound is beginning to defy gravity as it continues to climb versus the dollar despite several issues facing the economy.

In addition to the problems associated with Brexit, the escalating row with China, and fears over a second spike in the Covid-19 pandemic, the Government is now facing criticism over Russian interference in the Scottish and Brexit referendums as well as an attempt to influence last December’s election.

While any such meddling is strongly denied by Boris Johnson, use of London as a primary location for laundering Russian money has drawn further unwanted criticism for the Government.

In the period between the end of March and the start of June, the UK borrowed more than it did over the whole of 2019. While no criticism can be levelled at the degree of borrowing, Chancellor Sunak will be facing pressure to balance the books. He warned yesterday of further pay disappointment for public sector workers despite announcing a pay rise for 900k workers.

The CBI will release its survey of industrial trends on Friday and this should provide a degree of information about how industry views the economy going forward. Last month the outlook was at record negative levels giving a reading of -58. The June survey is still going to be well into negative territory at around -40 but it will provide a view of how the Chancellor’s latest measures have been received across a broad spectrum of the economy.

The pound rose to its highest level in six weeks versus a wilting dollar yesterday. It reached 1.2767, closing at 1.2731. It is now significantly overbought and may need to correct if it is to challenge resistance at 1.2810. Sterling has now retraced a significant portion of its fall at the time of the first Covid infections but is still trading under the influence of the greenback.

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Employment and Federal support key to recovery

A double dip recession where the economy looks to be over the worst of its contraction only to fall back is being predicted in several quarters by analysts who fear a second spike in Covid-19 infections as well as criticising the Federal response over aid to those who are either furloughed or are having to start claiming unemployment support.

The original support package with paid $600 per week to those in need of support expires at the end of the month and while further measures are being worked on fears remain that the level of support will be significantly reduced.

Thirty-four States are still seeing increasing levels of Covid-19 infections and several of those are still opening up their economies. It is a long-held view within the U.S. psyche that being employed is paramount and there is a strong radical belief in making your own mind up and not being told what to do by the Government.

Facing an unprecedented set of demands from the Legislature at both State and Federal level has had the effect of challenging those values leading to some reckless behaviour undoubtedly undermining efforts to bring the pandemic under control.

Meanwhile, the dollar index moves further away from the 100 level that it was sitting comfortably above at the start of the pandemic. While a weakening dollar is of benefit to the U.S.’ trade figures, with a recession most likely already under way, that benefit will be swallowed up by the degree of support the economy currently needs.

President Trump is in the mood to question every piece of data, whatever the source, that casts a negative light on the ability of the economy to recover within a short span of time, preferably before the election. It is rumoured that plans are already being worked on to see what powers he has to declare the election void should he not win sufficient votes to defeat Joe Biden in November.

The dollar index fell again yesterday, allowing its constituent parts to challenge recent highs. It traded down to a low of 95.04, closing at 95.128, Having broken the lows seen in mid-June, it is looking to challenge the low from early March.

An ending with horror better than never ending horror

Saying it does not make it so!

The sweetness and light that has emanated from EU Heads of state since the announcement of progress over an agreement for providing support for those nations most badly affected by the Coronavirus pandemic belies serious problems across several key areas of the bloc.

The creation of an Eur 750 billion fund to provide support has been hailed as a ground-breaking deal that shows the desire of the 28 nation Superstate to work together, move towards closer cooperation and eventually become a single political and fiscal entity.

A glimpse behind the curtain may tell a different story. It is fairly clear that several nations agreed to smile for the cameras through gritted teeth and there are questions at several levels about the benefit of being on the receiving end of almost continuous requests for support.

A union which is divided both north and south and now east and west will find it difficult to realize its potential and given the degree of angst that the current issues have created, it will be extremely difficult to find long term solutions without the pressure of the pandemic.

Of course, the announcement of the compromises between the frugal four and the rest of the EU has been welcomed by the market as it papers over the most serious cracks in unity. The issuance of the first common bonds by the EU is a significant step not welcomed by every nation but if it can solve the requirement of those with the greatest need it is seen as a step worth taking.

The decision to link the budget which is supposed to be agreed for the next seven years is a dangerous step and will certainly lead to the need for a supplemental budget somewhere down the road.

The market greeted the news of an agreement by buying the euro. It reached a high of 1.1539, closing at 1.1526. That was its highest cloning level since January last year.

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.”