26 August 2020: Activity showing signs of levelling off

Activity showing signs of levelling off

26th August: Highlights

  • Sterling shrugs of weak Retail and distribution data
  • Savings growth to hit sales
  • Germany to drag the region up?

Sterling struggling to make fresh gains versus dollar

The UK economy is showing signs of a more gradual phase of activity following a surge in demand as the lockdown was eased for the retail and hospitality sectors.

The CBI distributive trades data which was released yesterday showed a surprise fall of 6% month on month following a 4% rise in July and a market expectation of an 8% increase.

While a fall was a shock to the market, analysts believe that the overall trend for the quarter will still point to a strong recovery, but the pace will be more sustainable.

With slow progress being made in Brexit negotiations, public debt topping £2 trillion and the spectre of a more generalized second spike of Covid-19 hanging over the country, the outlook for the pound is for more volatility than has been seen recently.

As with all G7 nations, employment remains the most significant challenge facing Governments. When furloughs and unemployment relief schemes were first introduced it was made clear by the Chancellor that the level of support being given could not be a long-term solution. The time is fast approaching when a decision will need to be made on where the country goes from here in terms of what replaces the cash handouts.

It is most likely that it will take the form of support to create jobs and avoid the wholesale unemployment that has been predicted. If the level of unemployment reaches three million by the end of the year, it will stretch the period until the economy returns to levels of growth seen last December by a couple of quarters at least.

Yesterday, the pound made ground versus the dollar despite the disappointing data as traders took the unusual step of looking at activity longer term. It rose to a high of 1.3170, closing at 1.3151.

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White House in danger of taking its eye off the ball

With a little over two months to go until the election of a new President is due to take place, the Administration has almost completely switched to election mode and to the man in the street, is in danger of forsaking its plans for supporting jobs and the wider economy.

While a weaker dollar and a rise in risk appetite may make the country an attractive destination for investors, the administration is still prevaricating over the replacement for additional unemployment benefits. This payment was not only supporting families but also the return to growth following the contraction of almost 33% in Q2,

With almost 13 million jobs having been lost since March, it is no surprise that a poll conducted recently shows that the general public have become more frugal and are putting aside greater amounts than have been seen for several decades to protect them should the recession turn into a depression.

45% of Americans are putting aside greater sums than they would normally while banks are reporting an increase in the paying down of debt. This is despite record low interest rates and is a major concern for growth going forward.

The thrust of the support that was provided was to encourage people to go out and spend but that is gradually tailing off as has been seen in both the UK and Eurozone. Two thirds of the population say they are spending less on household activity, even though lockdown has been eased significantly, while Federal Reserve data shows that close to $1.5 trillion more is being retained in current accounts as a new spirit of frugality emerges.

Market activity has been slow so far this week as the market awaits the speech from The Chairman of the Fed tomorrow at the Jackson Hole Symposium. The event will be mostly virtual but will be no less significant for that.

Yesterday, the dollar index fell back a little from the previous day. It reached a low of 92.96 and closed at 93.01. There is a gradual improvement whereby the index is making higher lows and that shows that it is supported at lower levels.

Data shows recovery well on the way

Twas ever thus. The recovery of activity in the Eurozone is going to depend on Germany leading the way. Yesterday’s IFO data showed that the business climate and future expectations are on the rise.

This is not unusual and has become the overall theme of the region where the German economy sets the standard and drives the region’s economy forward. While this has been the case ever since monetary union was agreed twenty plus years ago, there may be a significant change coming.

Angel Merkel the German Chancellor and a beacon of longevity will step down next year having already relinquished the Leadership of the CDU.

Just how that will affect the region is so far unsure. There is no doubt that the German and French Governments are the leading lights of reform to the EU itself with Emmanuel Macron in particular pushing for closer integration as a prelude to a more Federal group.

Merkel will be succeeded by Olaf Scholz as the CDU Candidate in next year’s election of a new Chancellor. Scholz has served as Finance Minister and is said to have a close relationship with Bundesbank President Jens Weidmann.

However, it is by no means certain or even likely that the CDU will win the election with the Party currently third in the polls behind the SPD and Green Party.

With German leadership becoming more vital to the EU as it struggles to emerge from the shadow of Covid-19 uncertainty is bound to weigh on the currency.

So far this year, and particularly over the past two quarters, the euro has remained in the shadow of the dollar. This has been due to a change in the overall market dynamic where the dollar index is seen as a more reliable indicator of the strength of the greenback despite its somewhat archaic makeup. This means that hedging positions involves increased activity for the single currency.

Yesterday it was in a narrow range between 1.1784 and 1.1843, closing at 1.1834.

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.”