Rates unchanged until Q3 2022
23rd March: Highlights
- Johnson to take tough stance over vaccination imports
- Fed Officials believe Fed still well short end to bond buying
- ECB officials remain confident despite likely contraction in Q1
Support to remain either as necessary or as a backstop
The Bank of England is facing a sight unknown in that there may be a need for rates to be cut into negative territory depending on two factors.
Negative rates would be a significant step into the unknown with analysts and economists likely to be divided on the effect and the time they will be necessary.
No one can say just what the reaction of the economy will be to when the lockdown is lifted and how long the pent-up demand will exist. Second, the effect on business of a sustained lockdown that may have made hundreds, even thousands no longer viable.
It is a definite truism that when the market becomes predictable, either investors move on or there is a downturn or economic event that provides volatility.
The current Pandemic is not an economic event and has affected G7 countries fairly evenly no matter the argument about lockdowns vaccinations and foreign travel etc.
That means that currencies are tending to react to the major drivers almost in sync.
The pound is expected to be able to maintain its current relative strength driven by optimism generated by the fact that with three weeks to go until the next major lifting of restrictions more than 50% of the adult population have received their first jab.
Prime Minister Boris Johnson spoke yesterday of his concerns that the third wave that is sweeping the European mainland will wash up (his words) on UK shores.
This morning will see the employment report and there is unlikely to be any major shift since economically very little has happened since the last report.
There will be a gradual increase in the numbers of jobless, but the major event won’t be until the Autumn.
The pound corrected a little yesterday but bounced back to close virtually unchanged at 1.3865 just nine pips lower than Friday.
HSBC sees recovery as a little premature
The Bank’s economists see the dollar ending the year lower than it is right now. That may be one of two things. Either that is the HSBC house view, and they are simply talking their book, or it is a doffing of the cap in admiration that Jerome Powell may be able to keep the lid on an economy that remains in danger of overheating.
Only time will tell.
For now, evidence of the recovery is in relatively short supply.
A strong employment report for February has been followed by underwhelming weekly jobless claims and although confidence indicators are in positive territory they are forward looking and backed by the expected success and effect of the stimulus package.
Those who are currently bullish about the dollar index appear to be basing their judgement on the fact that the economy is going to require some attention as inflation begins to pick up.
It will be an immeasurable act of sorcery from the FOMC if they persuade the market that inflation, rising to challenge anything above the 3% level for any length of time is acceptable and requires no action.
Jerome Powell spoke at the BIS Conference but limited his comments and answers to all matters digital.
As and when the Pandemic has been defeated, green investment and digital currencies will certainly be the next cabs off the rank.
The dollar index had a relatively quiet day yesterday. It rose to a high of 92.15 but drifted back to close at 91.76.
A strong contraction due to strict measures expected
While the Pandemic is likely to decimate the country’s output, it is unlikely to bring on the effect of 1945.
The Central bank is most concerned about the fall in the service sector which, despite Brexit, the major financial centres of Frankfurt and Paris have been unable to claw back a share of business despite early success seen by Amsterdam in share trading.
One of the more staggering statements made by an ECB Monetary Policy Committee member during the entire Pandemic was made by Klaas Know, the Dutch Central Bank President yesterday.
Referencing higher bond yields, Knot said that the rise was due to improving fundamentals. While it is true the outlook for inflation is for a significant rise, although that could be controlled by the direction of the currency, prospects for stronger growth are difficult to see without rose-tinted glasses.
His Boss at the ECB Christine Lagarde was a little more circumspect in her comment at the BIS meeting. She sees the economy as in the midst of a period of uncertainty. This is driven mostly by the new wave of the Pandemic and the situation with vaccinations.
Lagarde repeated what is now the only fundamental data that the market can rely upon. This has given Pfizer and AstraZeneca an incredible degree of leverage as the EU Commission meets this Thursday to discuss the banning of exports of the vaccine in order to level up the distribution.
By using the term level up, Ursula von der Leyen means adjusting the narrative to suit the EU.
Yesterday, the euro rallied, reaching a high of 1.1946 but it will be interesting as the week wears on if their failure to agree a vaccine strategy becomes clear, the single currency doesn’t nosedive back to recent lows.
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.”