Easing restrictions still a long way off
25th January: Highlights
- Border closures too little too late
- Yellen to push Powell over negative rates
- UK the first but maybe not the last
New variants slowing progress despite vaccinations
Boris Johnson won the dubious honour of being the first European Leader to be contacted by the new U.S. President Joe Biden, although it seems that his call did not contain any encouragement for the PM regarding a trade deal between the two countries.
While the Government’s vaccination programme is now generating close to 500k inoculations a day, the Prime Minister and his Health Secretary face several tough questions this week: First, why hasn’t been more done to close the borders sooner? What is the most beneficial period between first and second injections? and how effective is the vaccine against the new strains of the virus?
The Health Secretary admitted yesterday that small numbers of the Brazilian and South African variants are present in the UK.
While senior officials from the Bank of England were reasonably bullish about the country’s recovery from the Pandemic when interviewed last week, the Government appears to be more realistic and less sanguine about the prospect of a strong second half of the year.
There is growing pressure on the Chancellor to increase his commitment to helping those both individuals who have become unemployed and businesses for which the future appears particularly bleak.
There has been talk of a rebellion amongst backbench Members of Parliament on the Government side about Boris Johnson’s reluctance to consider (he would call it speculate) about when the lockdown can be diluted. Since the vaccination programme is advancing and most vulnerable groups are likely to be protected by the middle of next month, the question is being asked why a gradual winding down cannot begin.
The pound had a fairly mixed week, with traders seemingly happy for it to remain in its current range. Versus the dollar, it traded between 1.3519 and 1.3746. It closed slightly higher on the week at 1.3680, still shy of medium-term resistance at 1.3720, despite trying to break higher.
Bidens inclusivity already under threat
Democrat Congressmen are already demanding that the President abandon attempts to gain the support of Republicans while Conservative Senior Republicans say there has been little attempt from the new administration to listen to their concerns.
It now seems likely that the first major piece of legislation to be sent to the Hill will be rammed through by the Democrats, thus both setting the scene for the first two years of Biden’s presidency and perfectly illustrating the core difference between the two sides.
Republicans acknowledge that vaccine distribution and delivery is essential to getting the economy back on track, but they feel that this is not yet the time for such a huge overall stimulus package so soon after the $900 billion which was only approved recently.
With unemployment still unnervingly high, there is sure to be further stimulus coming down the pipe, and while, in the words of Janet Yellen, Biden’s pick to be Treasury Secretary, Congress should agree to go big on stimulus and ignore concerns over the national debt, Republicans will continue to try to justify a more targeted approach.
Yellen’s candidacy was passed unanimously by Congress and her confirmation is now no more than a formality.
During her time as Fed Chairman, Yellen came in for a degree of criticism for being too reactive and allowing policy to drift. It seems that as Treasury secretary she plans to be more assertive, already naming China as the country’s most strategic competitor, setting the two sides as rivals.
She went on to say that China needs to curtail its abusive, unfair, and illegal practices. These comments will have been noted in Beijing as the first salvo in the continuation of the trade talks between the world’s two largest economies.
Last week, the dollar index was unable to continue its recent correction and looks set to fall back towards its recent lows. It didn’t manage to breach the 91 level but neither did it fall below 90. It reached a low of 90.05 but recovered a little to close the week at 90.23.
The FOMC meets this week and is expected to be supportive of the new administration. However, it is unlikely to act on lowering rates, or growing the Fed’s balance sheet any further immediately.
Currency strength driving long-term concerns
Despite this, it is rumoured that the way the Eurozone economy has developed and the foisting of restrictive policies on the weaker nations which have been heavily penalized for every transgression even before the Pandemic hit, has led them to consider their futures.
While it will be some time before the usual suspects, Italy, Spain, and Greece will consider their futures, the rumblings that are beginning should be taken seriously in Brussels. They feel that there is a significant difference between what is considered by the EU Commission to be inclusivity in being kept informed and sitting at the top table, where decisions are taken.
The Union is in the grip of the Fugal Five plus Germany, and the golden rule, where the one(s) with the gold make the rules is being applied.
The social, political, and financial makeup of the European Union is close to total disarray. Little has been done, in public at least, to resolve the issue of the relief fund and budget which has been vetoed by Hungary and Poland, for reasons which amount to blackmail, and have no direct bearing on the subject of the proposals.
The distribution of the vaccine has seen the programme fail to make an impact so far on the ability of individual States to loosen lockdowns.
With the most serious economic effect of the Pandemic, unemployment, handled at the national level a concerted effort to provide jobs across the region, given the way Brussels holds up the four freedoms as the cornerstone of the Union, is desperately needed or to be funded at least..
The ECB meeting held last week was yet another damp squib. Anyone with a basic knowledge of or interest in the workings of the Central Bank could have written Christine Lagarde’s speech and subsequent comments.
The lack of dynamism and leadership, in spite of the best intentions of Ursula von der Leyen, is also beginning to concern the nations of Southern Europe which have borne the brunt of both waves of the virus.
The relative strength of the single currency adds to the pain of those countries who are used to being able to weaken if not devalue their currencies to provide a boost to their economies. The benefit of low inflation which a strong currency promotes is lost on them.
Last week, the euro reached a high of 1,2189, closing at 1.2168. This week’s Fed meeting will be the most significant driver for the euro.
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.”