Sterling benefits from U.S. rate concerns
26th February: Highlights
- Trade talks about to get real
- Possible rate cut hits dollar
- Coronavirus more of a threat to EU than UK
Johnson’s north/south plan threatened byHeathrow
A report published yesterday poured a little cold water on the plan as already approved plans for investment in Heathrow Airport to maintain its position as the hub for travel to and from Europe means that there will be very little cash available in the short-term for significant investment in anything other than the controversial HS2 high speed rail link.
The UK economy is set to grow at around 1.2% YoY in the first quarter of 2020 as the effects of the Brexit agreement and an end to political uncertainty provide impetus. However, depending on how the Coronavirus epidemic affects global trade and further, if/when the posturing over a trade deal between the UK and EU ends and serious negotiations start could mean that growth falls off for the rest of the year. While the Bank of England stands prepared to cut short-term rates if necessary, no immediate cut is likely.
The UK stands firmly at the front line of innovation regarding internet technology with its pledge to provide gigabit access to the entire country by 2025. While it sounds impressive that the entire country will have access to download speeds in excess of 1k mbps, in practical terms it won’t provide the game changer ministers predict since download speed in the majority of urban areas is more than sufficient for most needs both domestic and commercial.
Despite the EU negotiations which remain the number one focus, the country remains at threat from structural issues, particularly Brexit, as the country remains tied to the Eurozone and its woes in the short term. The EU is, and will remain, the UK’s largest market by some distance and the efforts to remain a significant trading partner post 2021 will take more investment particularly in the area of services where the likes of Paris and Frankfurt covet London’s position.
Yesterday’s CBI activity report was positive and showed that the effect the progress of Brexit is having on business. It was nowhere near as high as had been predicted. That, in itself, shows the predicament facing the country. It is prepared to believe that while Brexit will be good for the country, there is still concern over what the country will look like in twelve months time.
Yesterday, the pound was reactive to the dollar’s gyrations. It rose to a high of 1.3018 but drifted lower to close at 1.2999
U.S. plans for coronavirus containment well advanced
Trump has switched into rel-election mode which is very similar to his make America great again rhetoric in the run up to the 2016 election.
His supporters, by and large, make up a huge swathe of the popular vote, and while it has no real concerns over foreign policy as memories of 9/11 fade, other than healthcare, he is delivering what they want.
Yesterday’s all capitals message on social media about support for the ailing agricultural sector was a blatant yet brilliant piece of electioneering. He tweeted that should struggling farmers in the midwest need greater support while the trade deals with China, Mexico and Canada kick in Federal support will be available.
The dollar index followed the dip in equity markets yesterday as it fell even further from the mystical 100 level.
As I said last last week, the market always finds a way to punish traders when they see a one way bet.
The index fell to a low of 98.88 and closed at 98.98. The correction, since that is what we still have to call it, given the comparative positivity of the economy, may continue for some time to come, but the proximity of the NFP data and the FOMC meeting may bring cause for traders to become more circumspect.
Frexit appearing in EU lexicon
In truth, Macrons vision, which was magnificently sold to the French public, has remained just that, a vision. The singularly fickle French man/woman in the street has a habit of believing everything they are told when they are in the mood for a change.
Although Macron ticked their boxes being young, dynamic and positive for France to play a significant role in Europe, his ability to be seen as anything more than a puppet of German Chancellor Merkel has led to concerns over what a second term may bring.
The leader of the far-right, Marine le Pen, resoundingly beaten by Macron at the last vote has rebounded and is by many evaluations, ahead of the President in polls in the lead up to regional elections to be held in May.
Any significant upsurge in far-right attitudes will inevitably bring with it thoughts of Frexit and the demise of the entire European Community.
While it is nice that the entire region uses the same currency and that has facilitated seamless supply chains, the lack of follow through in the EU’s domestic consumption continues to bring concern. The single currency brings with it a single monetary policy and while that remains, it will be a drag on growth which is finally being accepted after twenty years of excuses.
Yesterday, the euro remained in the shadow of the dollar, despite a rally away from the 1.0780 support.
It reached 1.0872, closing at 1.0852. The relief may be short-lived. The market remains convinced that further falls are likely, but remember, the market has a strange way of punishing one way bets.
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.”