Sterling suffering from old problems
23rd July: Highlights
- Sterling lowers chickens come home to roost
- Correction or trend
- Euro celebrates Relief Deal
Sterling unable to match euro rally versus dollar
While the market remains unpredictable, the outlook may have changed as the rally in Sterling came to something of a halt yesterday despite the dollar’s continued fall.
Brexit, China, and the state of the economy remain the principal drivers for the pound. Each has a different time scale with the economy, the most pressing issue followed by Brexit and the long-term effect of the escalating row with China.
China is well known for playing the long game and won’t be rushed into retaliation over the UK’s decision to abandon use of Chinese tech giant Huawei’s equipment for its 5G network. It is, however, very clear that when it comes the reaction will be swift and possibly severe. It is to be hoped that when that day comes, the U.S. will stand by its side of the bargain and see the UK as continuing to have a special relationship.
For the entire extent of the Brexit negotiations, rumour and counter rumour have been leaked by both sides in an effort to gain influence. It must be considered that that fight was a draw, but the next few months may see the victor declared. The UK is now certainly leaving the EU at the end of the year and it is impossible to say what the relationship between the two sides will be following that.
With the UK having borrowed £128 billion in the three months to June, more than they borrowed over the whole of the previous year, it remains to be seen how the Chancellor is going to deal with the economic fallout of the Covid-19 pandemic. The City is watching his every move with a feeling of mellifluous fascination as the pound’s fate hangs in the balance.
Yesterday it traded barely changed against the dollar but weakened versus a rising euro. It opened at 1.2731, closing just one pip higher.
Weakening dollar reflects risk appetite but also Covid fears
Today’s release of weekly data for jobless claims will continue to point to a slowing of the V-shaped recovery that the Administration has been promoting. A double dip or even one continuous recession into at least Q1 of next year continues to be a real possibility.
The eagerly awaited news about the plans for the renewal of the support for those whose jobs have been affected by the Pandemic cannot come fast enough. There is still an element of too little too late pervading the market.
This is despite the efforts of Fed Chairman Jerome Powell and his FOMC colleagues who have pumped liquidity into the markets to allow banks to provide necessary funding. The Treasury despite its lacklustre enthusiasm for helicopter money has also come to the party.
Nonetheless, the dollar continues to fall, and the correction is turning into a trend.
With the euro gaining after its miraculous achievement in finding an agreement over a relief fund, it could be said that risk appetite has improved, hence the fall in the dollar. However, if that were the case, analysts’ roles would be reduced to predicting every economic number, comment or action based upon its effect on risk appetite. Since there are far more factors at play than that, it is becoming ever more obvious that the U.S.’ handling of the crisis is causing the beginnings of a lack of confidence that it can escape its worst effect.
Yesterday the dollar index again fell. It reached a low of 94.81, closing at 95.01 It will need to repeat the significant rebound that was seen on March 10th, the last time it traded below 95, if it is not to reach a level not seen since October 2018.
EU makes it too easy to mock its success
In the meantime, it is time for bunting and celebration as yet again victory (of sorts) is grabbed from the jaws of defeat.
For now, the markets are going along with celebrations as the issuance of the first common bonds issued by the EU are sure to be gobbled up by voracious traders.
It is what will happen should there be any kind of misstep or the shadow of a default that will exercise traders in the coming months. And then, the supplemental budget.
Another issue kicked down the road. Let’s hope the economy has picked up and industry manufacturing and services have learned the lesson of not trying to compete globally when they have a large and perfectly serviceable market on their doorstep.
The Euro rallied versus the dollar and pound yesterday. It reached the heady heights of 1.1601 versus the dollar, closing at 1.1568 on a bout of profit-taking. Meanwhile versus Sterling, it broke below 1.10, reaching 1.0944 before the pound rallied to close at 1.1010.
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.”