UK locked down as Johnson acts
Morning mid-market rates – The majors
24th March: Highlights
- Overall risk aversion hits Sterling
- Promise of massive stimulus supports dollar
- Suspension of budget rules supports the euro
Concerns over post-virus recovery hit Sterling
The measures which amount to a virtual lockdown, and will be enforceable by law, left no room for doubt that the Government is serious in its efforts to slow the spread of the disease.
It is impossible to measure the economic effect of the lockdown with retailers other than food and medicines forced to close, venturing outside severely curtailed and the ability to travel to work limited to essential industries only.
The economy is likely to suffer even further than had already been anticipated as the pound continued its journey south yesterday.
While it may again be a case of fitting the headline to the scenario, it was rumoured yesterday that the UK will suffer more than its G7 partners as the world recovers from Coronavirus as it is still mired in negotiations over Brexit with a December 31st exit date now impossible to achieve.
This means that unless Johnson exercises his threat to leave by that date, come what may, the UK will find itself in something of a halfway house with one foot in the EU and one out.
Brexit has been pushed firmly to the back of both sides’ minds as measures are announced to keep the public safe but once the virus is under control it will remain a significant drag on the economy going forward.
Yesterday, the pound fell to a low of 1.1447, closing at 1.1545. The charts appear to be signalling significant support around the 1.1450/1.1475 area but that is likely to be unreliable if there is a further shock or the dollar buying frenzy is reignited.
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Confidence measures collapsing
President Trump, in a social media message yesterday, poured scorn upon the Democrat suggestions for the Bill which is being negotiated between House Leader Nancy Pelosi and Treasury Secretary Steve Mnuchin. Trump asserts that the Democrats are taking advantage to add items to the Bill that are in no way related to the crisis.
This may scupper the entire deal but as is often the case in U.S. politics it may also be a severe case of brinkmanship. The Bill failed to pass through Congress last evening as Democrats rejected the mix of measures, seeing too much support business and not enough being spent on hospitals and medical facilities to fight the virus head-on.
The programme being negotiated will be open ended as to size and expiry and will be expanded to include purchases of corporate liabilities, direct loans to business and support for SMEs.
While this is similar in format, if not size to what is being seen in other nations, the changes to the country’s historically unstinting rejection of state aid for business demonstrates a degree of flexibility from Politicians and the Central Bank, although, possibly not the President.
The dollar remains strong as, while the frenzy to buy dollars last week has abated somewhat, the greenback remains the ultimate safe haven play for traders.
Yesterday, the dollar index traded between 102.48 and 101.58. It opened on the high and closed on the low, as markets, while not calm, lost the frenzied activity seen recently.
Germany in historic U-turn
As would have been a certainty even before it became the epicentre of the pandemic in Europe, Italy became the first nation to rip up the rulebook, closely followed by France and Belgium.
If ever there was an economic acceptance of the seriousness of the situation it is the historic acceptance by Germany of deficit funding that it has strenuously avoided for itself and that it inflicted upon other Eurozone nations as a condition of the formation of the single currency.
Germany announced Eur 156 billion of new funding to fight the virus at home as its borders remain closed even to other Schengen countries. The free movement of people and goods, one of the four pillars of the EU have been suspended indefinitely as the fight to contain Coronavirus continues.
Any collective borrowing to provide a significant pan-EU war chest has been rejected much to the annoyance of, in particular, Italy and France. Germany may have accepted a turning on of the fiscal tap but being jointly responsible for other nations debts was a step too far.
Eur 400 billion will be made available from the European Stability Mechanism, which will come with strings attached as Brussels tries to cling to a degree of financial control.
Yesterday, the euro rose to a high of 1.0827, but was unable to hold onto its gains and it fell back to close at 1.0727.
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.”