23 April 2020: Double Whammy approaching

Double Whammy approaching

23rd April: Highlights

  • Brexit return likely to drive Sterling
  • Index marginally higher as data trumps oil price
  • The recovery starts here. Will anyone notice?

Brexit decision date and Release of lockdown approaching

A double whammy of the continued lockdown and an approaching deadline over an extension to the date on which the UK finally leaves the EU is likely to see the pound suffer in the coming weeks.

Talks over the future relationship between the UK and EU post-Brexit have been continuing via video link as the Coivid-19 pandemic has meant face to face meetings are impossible.

The UK maintains that it will leave the EU on 31st December come what may, while there have been calls from a variety of officials from the Union for that date to be extended.

The UK remains steadfast that it will leave by the end of the year with no deal if necessary. There have also been rumours circulating that the UK will refuse to pay the £39 billion divorce payment should there be no agreement. That would be another blow to Brussels and something it will be keen to avoid.

The deadline for an extension to be requested and agreed is around ten weeks away and the UK team have reiterated that it will not ask for an extension, nor will it agree if Brussels formally requests one.

The continued criticism of the Government over the handling of the pandemic has been exacerbated by the absence of Prime Minister Boris Johnson from the front line although it is becoming more certain that he is acting behind the scenes to ensure the repose remains vigorous.

With Brexit returning to the limelight and the continued issues surrounding Coronavirus, the volatility around Sterling is likely to continue. Yesterday it rallied a little from a low of 1.2274, reaching 1.2386 before settling back to close at 1.2333.

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Trump believes States are safely coming back

Despite numbers which still suggest the opposite, President Trump insisted at his most recent press briefing that several States that have partially lifted the Covid-19 lockdown have done so safely and successfully. He did however criticise Georgia for announcing that certain businesses would reopen from Friday.

Even though it is way too early to declare that the peak has been reached and an imminent limited return to work as a prelude to a full countrywide lifting of restrictions, Trump’s determination that the country should open up as soon as possible remains.

The continuing rise in first time unemployment claims will be a major indicator of the urgency with which the administration views the economic necessity for the country to get back to work. Today’s data for Jobless claims which have averaged 5.5 million over the past four weeks are likely to have improved a little although there is little evidence available on which to base that judgement. It is unlikely that there will be a significant reaction for the dollar unless the data is significantly better than has been forecast.

Steve Mnuchin the Treasury Secretary injected a note of realism into the lockdown debate yesterday by stating that he didn’t expect the entire economy to be functioning again before the end of August. White House economic advisor Larry Kudlow was a little more bullish, stating that he saw an improvement in the economy coming as soon as the beginning of the third quarter.

As well as today’s data for weekly jobless claims, activity indexes for manufacturing and services will be released later today. Both are expected to fall even further into contraction although depending on how the country reacts to the limited lifting of the lockdown, this could be the nadir for activity although that is far from certain.

Yesterday, the dollar continued to be driven by global risk appetite. It rose to a high of 100.50 and closed at 100.33. While there less structural reason to buy dollars as the scramble for liquidity has abated, the 100 level now appears to provide a degree of support.

The question remains; Subsidies or loans?

While the debate over how the EU will provide a concerted effort to aid the recovery of the Union from the Covid-19 pandemic the desperation of those nations most affected by the outbreak rises.

Over the years since the financial crisis there has always been a feeling that the European Commission treats every crisis as an academic discussion without actually considering the urgency of the situation or putting any plans in place.

It is approaching a month now since EU Heads of Government handed the task for finding an acceptable method of providing funds to the most stricken nations and so far, all we have seen is what they disagree about.

As it stands there will be no Coronabonds issued and that position is unlikely to change. The current discussion appears to revolve around a similar stalemate over whether any funding should be in the form of subsidies or grants and loans.

From a purely economic standpoint the richer nations, who coincidentally also will not countenance bonds issued with a joint guarantee, should agree to a recovery fund but since they will be putting up most of the funds that will be unlikely to happen.

As the limited lockdown continues in several nations, the question of a second surge in infections is being considered. While the economy is already going to be severely damaged, a second lockdown would be potentially catastrophic.

Activity indexes will also be released today for the entire region and as with the U.S. only an improvement over last month’s data will see a move for the currency. However, this is unlikely to be the lowest point for activity despite a limited lifting of restrictions given the continued disagreement over the way forward.

Yesterday, the euro traded in a narrow range versus the dollar between 1.0885 and 1.0803, closing a little lower on the day at 1.0823

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.”