25 May 2021: UK pushing ahead with trade deals

UK pushing ahead with trade deals

25th May: Highlights

  • MPC members unable to agree monetary policy
  • Inflation to continue to rise due to bottlenecks and supply chain issues
  • Eurozone recovery gaining pace

Post Pandemic UK beginning to solidify

The news that the two major Covid vaccines are effective against the Indian Variant of the virus have provided the UK economy with further impetus as the country is within a month of the full lifting of restrictions.

Unless there is a significant change to the data in the next two weeks, the country will be able to reopen completely.

The Government has begun to look at life after Covid.

Post-Brexit trade deals are being negotiated. The most important agreement will be with the U.S. although it looks as though the steel industry will be sacrificed to ensure that the deal goes ahead.

The UK’s trade minister is studying the lifting of tariffs on UK imports from the U.S., clearly a demand made by American negotiators.

Also in the pipeline is a tariff free deal with Australia as the country begins its plans to become a global trading hub as life after Brexit also begins.

There have been well documented concerns over the ability of hospitality venues to attract staff since the reopening. This contrasts with footfall in High Streets which has improved, but is still close to 30% below pre-covid levels.

The structural changes that lockdown brought to shopping habits appear to be difficult to break. Many familiar names have, or are on the brink, of disappearing as changes that people have become used to become entrenched in society.

Many City firms are planning to introduce permanent work from home initiatives with the City of London Corporation looking to convert the surfeit of office space in the Square Mile to homes.

This means that some of the most expensive office space in the world will revert back to how it was centuries ago.

The knock-on effect is yet to be really understood as the recovery is still to take shape but several sectors particularly in the services group may be sacrificed on the altar of post-Covid progress.

The pound continues to gain traction from the news that the Roadmap to Freedom is unlikely to be derailed and the feelgood factor is taking hold.

Yesterday, it rose to a high of 1.4182. Closing at 1.4179. There is a growing area of resistance around the 1.4190 level which coincides with support or the dollar index.

A lot will depend on how the market sees the short-term inflation picture in the U.S. to provide the impetus of a break of that level and a move towards the medium-term target of 1.4380

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Risk rising but not uncontrollably so

There has been a lot written since the U.S. Administration provided its massive stimulus package directly to the heart of the U.S. economy about the rate at which inflation is likely to grow.

That discussion still has a long way to travel although it is becoming clear that the FOMC is not going to provide a significant level of advance guidance and the reason for that is slowly dawning.

The Fed appears to be conflicted, not about overall monetary policy, that continues to receive overwhelming support from regional Fed Presidents, whether members of the FOMC this year or not.

The issue is now financial instability.

That concern goes hand in hand with inflation worries but an overheating economy is vastly different to bubbles that are beginning to form in asset markets. House prices continue to rally as home loans become relatively easy to find at rates that are clearly mouth-watering.

Stock markets, where valuation methodologies based upon incredibly high future earnings potential are going through something of a sea-change. The dominance of the tech giants masks issues further down the food chain.

The concerns are linked to the Fed’s determination to ensure that the recovery of the economy is on totally solid ground before it begins to withdraw support.

The timing of that withdrawal becomes more critical almost every day.

Too soon, and the economy could overbalance, and all the stimulus could count for nothing. Too late and the U.S. consumer despite having harvested a significant increase in savings may see household debt become unmanageable as interest rates begin to rise.

The fact that the Fed seems to be in a quandary is an understandable yet entirely plausible concern for investors. The weakening of the dollar to promote competitiveness may have now run its course. This is being seen as the dollar index, while not attracting too many buyers is now beginning to build solid foundations.

Yesterday, it again tested support around 89.80 and, again, buying interest was fairly solid. It closed at 89.82 as traders await encouragement to increase position size.

Demand for goods and services highest in 15 years

Could it be true? Have the ECB and EU Commission dodged the Covid bullet?

The latest data for activity within the Eurozone shows the largest increase in 15 years.

The sit on our hands and pray philosophy that the ECB has either decided upon, or had forced upon it, depending on how positively you view the entire project, may just be beginning to bear fruit.

The headlines are all about the effectiveness of the rollout of the vaccines and the reopening of the economy but the policy of avoiding action until absolutely necessary could still come back to bite the Union.

Banks still have massive bad loan portfolios on their books. Net debt to GDP ratios across the entire union are close to, if not above 100%.

When we look back on these issues, and new ones gradually forming it becomes clear that legacy issues that have not been fully dealt with continue to form part of the current and future worries.

A new potential minefield began yesterday with the unlawful rerouting of a commercial airliner that was travelling between Athens and Vilnius that was forced to land in the Belarussian Capital of Minsk in order that a dissident journalist could be detained.

While this issue has received universal condemnation, the EU finds itself in a delicate position dealing with loose cannon Belarussian President Alexander Lukashenko.

Lukashenko has been in power for more than 25 years and is emboldened by the support he receives from Moscow.

Germany will have a big part to play in the severity of any sanctions the EU places upon Belarus given the improving and growing relationship between Moscow and Berlin.

The two countries are cooperating on several large infrastructure projects mostly around the oil and gas sector.

However, for now the Eurozone economy is beginning to regain its composure and predictions of a quicker than expected recovery are starting to circulate.

It is hard to predict the medium-term path for the euro since it is already struggling to make fresh gains. The interwoven nature of the market means that the euro could weaken significantly just as the economy begins to grow.

This could see a double whammy for inflation with demand outstripping supply and a weakening currency delivering imported inflation.

Yesterday the single currency continued to tread water. It has traded in almost the same range for the past five sessions as pressure builds. Yesterday, it closed at 1.2214 having reached a high of 1.2229.

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.”