UK deficit likely to keep pound weak
25th March: Highlights
- Staggering Sterling gets a reprieve, for now
- Fed’s package drags the dollar lower
- Data predicts never before seen fall in growth
Analysts unable to support Sterling rally
The Government and Bank of England are, rightly, doing all they can with a series of unprecedented measures to provide support to both businesses and individuals but once the virus is in decline and the self-isolation of the entire nation is slowly removed their ongoing ability to provide the monetary stimulus necessary is in doubt.
The way in which the Government has introduced measures in a staggered manner which differs from other nations, despite the UK having advance notice since the country is around two weeks behind the most affected countries in Europe, is concerning investors and leading to concerns that the UK will be unable to match its trading partners recovery.
The UK’s large current account deficit will also be a drag on the economy going forward and will be another factor in the pound remaining weak.
Yesterday’s release of activity data shows that the economy is slowing at a pace that is even faster than was seen in 2008/9 as the services sector which accounts for 80% of GDP sees massive closures to deal with the spread of Covid-19.
Services activity was at 35.2 following a healthy 53.2 in February. This is in keeping with other G7 nations, but the market is, prematurely, concentrating on the future ability of the economy to bounce back since the UK may face greater headwinds than other comparable economies.
Yesterday the pound found a little respite from its recent falls as the dollar weakened. It reached a high of 1.1799, closing at 1.1758
Proactivity the key to survival
While there is genuine concern that there is a fracture between the reaction on the ground to the spread of Coronavirus and the comments being made by the Administration, the bipartisan package of measures proposed by Treasury Secretary Steve Mnuchin and House Leader Nancy Pelosi should alleviate concerns of workers who are being asked to self-isolate.
The financial hub of the U.S., New York is seeing the spread at its most virulent which has led to a state of emergency being introduced for the entire state, which means it is able to access Federal support.
The differences of opinion between President Trump and State Governors is becoming even more stark.
Trump commented yesterday that he hopes that the country can shake off the virus by Easter. This differs from just about every other nation in the west and with a comment from New York Governor Andrew Cuomo that the illness is spreading faster than a bullet train.
Trump is being criticised in several quarters for his more and more obvious comments seemingly favouring business over individual concerns. Last evening, he went on to say that unless the country reopened for business, it could suffer a massive recession or depression.
A recession is now more or less certain as, similarly to other western economies, services output fell off a cliff, falling from 49.4in February to 39.1 in March.
The financial markets remain convinced that the U.S. is most likely to lead the economic recovery but that may be despite, rather than due to, the efforts of the President.
The dollar index fell back yesterday in the wake of the economic package from the Fed. It reached a low of 101.05 but recovered a little to close at 101.80.
Annualized contraction in Q2 could reach 8%!
Questions are being asked about the ability of the EU ‘s leaders in any recovery with the legislative bodies of the EU Commission, EU Council and European Parliament so mired in bureaucratic red-tape that individual nations may be forced to go it alone in their recovery in a similar manner to what is currently taking place.
There will be a significant difference between any recovery from the Coronavirus pandemic and the 2008/9 financial crisis in that there will be a far larger human cost this time.
From what has already been said above, it is clear that the G7 economies are beginning to slow at an alarming rate but given the weakness of the Eurozone economy going into the pandemic, it was always likely that its economy would suffer most. So it has been proved with activity data being even worse than has been seen in the UK or U.S.
Services output has fallen to 28.4 this month, the lowest ever This has led economists to predict a fall of close to 8% in GDP quarter over quarter annualized between Q1 and Q2 should PMIs remain the same or weaken further.
The closing off of individual borders within the region, a measure that was so unexpected, it has never even been considered by the EU, has seen movement of goods severely hampered and should it continue for a significant period future data could easily be even worse.
There have been remarkably quick departures from a collective response to individual action which led to the relaxation of the Growth and Stability pact. The EU Commission was left with little option but to relax the pact since it was being ignored by several nations already and a percentage of those nations were in the more financially stable north of the region. This illustrates the lack of proactivity at the top which has led to an every man for himself attitude being displayed by several nations.
The euro is mired in a downwards spiral, but it depends on global reaction to U.S measures where it trades, since there will be little incentive for traders or investors to be buyers in the current environment.
Yesterday it traded between 1.0888 and 1.0721, closing at 1.0788.
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.”