23 June 2020: VAT cut imminent

VAT cut imminent

23rd June: Highlights

  • Brexit hopes hold Sterling above support
  • Economic outlook has political twist
  • Germany facing second spike

Fiscal support for wider economy welcome

The Prime Minister is expected to announce two major lockdown events later today which will see the UK back on the path to normality. Buoyed by the lowest number for fatalities and new cases since lockdown began, Boris Johnson is set to announce the reduction of the social distancing measure from two metres to one.

This will pave the way for the hospitality sector to reopen although there will have to be significant attention paid to ensuring there is not a second spike in the economy.

Rishi Sunak, the Chancellor is apparently putting the final touches to an announcement that VAT will be cut from 20% to 10% on several products. This will be the first cut in VAT since Labour introduced different rates for petrol and luxury items in 1974.

Yesterday saw the release of data which showed that output from factories fell at the fastest rate on record over the past three months. While this is hardly surprising given the lockdown conditions, particularly in the first month or so, it serves as a stark illustration of just how far the economy has fallen and the radical steps that will need to be taken to ensure that the recession doesn’t last well into next year.

One further issue that is exercising the Prime Minister is Brexit. In last week’s talks with Emmanuel Macron, the French President was optimistic about a deal. Prospects are good and he supports a mutually acceptable agreement being reached. He follows Ursula von der Leyen, the President of the European Commission in promising to work to make sure that trade between the UK and EU can work in as close to a seamless manner as possible.

With Spain having opened its borders to UK tourists and France, once the strongest critic of Brexit, looking for ways to ensure a smooth path, it seems that EUI members are coming to terms with the departure of one of its largest economies and the need for relations between the two sides to be as close to cordial as possible.

Yesterday, Sterling managed to close above support at 1.2350 and looks to remain in a range between that level and 1.2500 where previous support will now become resistance.

Yesterday, it traded between 1.2477 and 1.2335, closing at 1.2468.

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Democrats see clouds, Republicans ready to tan

The strength of any nascent recovery in the U.S. economy appears to be being considered on political grounds. In a recent survey in the U.S. 85% of Democrats describe economic activity as poor, while 65% of Republicans consider conditions as good.

There are several reasons for concern about the continued effect of Covid-19 on the economy of several States. While there is a growing fear that there will be a second spike in the Autumn, both Florida and South Carolina, two States that were among the first to reduce lockdown restrictions, have each registered record numbers of new infections over the past few days.

While major Corporations appear to be weathering the pandemic well, concerns are beginning to be felt across the country for small businesses. They are trying to survive with fewer customers coming through the doors, and the threat of the removal of Federal support is driving the view that this will be the sector which comes off worst.

Next week’s employment report is already taking on greater significance with views polarized by last month’s stellar recovery from the April data. There is a degree of speculation that there will be a significant adjustment to the May figures or that the June report will show further job losses.

This week, preliminary numbers for economic output will be released and recent data has added to optimism that this will show a significant improvement reaching closer to, but not yet achieving expansion. Last month activity fell to just below 40, while the preliminary expectation is for it to have bounced back to around the 47/48 level.

Yesterday, the dollar’s recent correction came to a halt. The index fell to a low of 97.00, closing at 97.04. While this remains within the realm of a correction, the greenback faces many different drivers both domestic and global. This makes plotting a short-term course more difficult.

Von der Leyen looking for forge closer ties with Xi

Yesterday, Ursula von der Leyen took a break from planning for life without the UK in the EU and trying to get agreement on the Pandemic recovery plan to hold virtual talks with Chinese President Xi.

As the Union has attempted to expand over recent years, it has struggled to forge strong international ties. This is odd since the volume of trade that leaves the borders of the region is significantly higher than the level of goods traded between the individual nations.

It is possible that given the reticence of established EU members to work together for the common good that the Commission has decided that it needs to find its place in the world order as the global economy begins to emerge from the Covid-19 pandemic.

Data to be released later this morning will show just how much the economies of Germany and the wider Eurozone have recovered so far this month. Several States have reopened their borders and relaxed social distancing measures.

There has been a concern over the past few days about the R rate in Germany but that now seems to be settling down again as the rise was put down to a single event in a factory in the north of the country.

Manufacturing output is expected to rise to 44 from 39.4 across the region while services output rose from 30.5 to 40.5, leading to a similar level of improvement for the composite figures. Similar levels of increase are expected from Germany.

As the market awaits news about the rescue fund, the euro reacted to a weaker dollar yesterday, climbing to a high of 1.1270, closing at 1.1260.

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.”