26 January 2021: Johnson firm over Lockdown

Johnson firm over Lockdown

26th January: Highlights

  • Sterling struggling to break higher despite encouraging vaccine data
  • FOMC to stand pat, but differently to ECB
  • Germany starts the New Year with confidence low and falling

Unemployment to rise back above 5%

Today’s employment report is unlikely to make pleasant reading. Forward projections expect the rate to top out close to 7% as the Pandemic will continue to hit business output for several months to come. Today’s data is expected to see the rate climb above 5% although the claimant count may fall marginally from November’s high figure of 65k.

This Government, which had been elected barely a single quarter before the Pandemic hit has faced several issues in trying to deal with both the social and economic fallout, has faced the additional irritants of an opposition that has no chance of coming to power for five years questioning and criticizing its actions together with a press that continues to ask questions with no answers.

There are growing demands for the Prime Minister to provide a timetable for the return of children to schools when it was only a month ago the demand was for schools to close.

Health Secretary Nick Hancock at yesterday’s press briefing was bombarded with demands from the media to provide a roadmap out of lockdown. His response was unequivocal in that there will be no change in policy until the four most at risk groups are vaccinated and that programme is on track to be complete by the target date of 15th February.

In the wider population there is still a great deal of discussion concerning any requirement for firms to demand new hires are vaccinated. There is some concern over the legality of such a move. The groundswell of those anti-vaxxers was seen yesterday in a large demonstration in Central London but overall, it is still expected that overall take-up of offers of a jab will be between 75% and 80%.

The Chancellor Rishi Sunak has been busy supporting several of the programmes he has introduced, including the £2billion kickstart scheme designed to get young people into the jobs. In the medium term, Sunak will need to work to reduce the effect of the Pandemic on the jobs market as public debt continues to rise and he faces the double whammy of falling tax receipts and higher benefit payments for those claiming.

The currency market remains in something of a confused state. Since individual currencies are valued against each other, the relative strength of each economy and the pace of its recovery is almost impossible to judge. The waters are further muddied, by traders preference for the dollar index which is hedged by positions in the individual components.

Yesterday, the pound closed marginally lower versus the dollar at 1.3676 having again attempted to cling to gains above resistance at 1.3720 and again failing.

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Inflation concerns to rise if money printing continues

A weak dollar is a blessing in the current environment. A very weak dollar not so much.

A very weak dollar under pressure from Chinese growth and activity will be close to a catastrophe.

The U.S. remains the world’s reserve currency and will remain so for many years to come as there is no viable alternative that has the backing, stature, and history of the dollar.

It was considered a real possibility when the euro was first introduced that it could challenge the greenback, but it is only twenty years old, has faced several severe challenges and there is an argument to be made that it may not be around in another twenty years.

The Chinese economy is continuing to grow at such a pace that it may outstrip the U.S., certainly in ten years, possibly five. However, the thought of the Yuan as a challenger to the dollar would send Washington into a paroxysm of jingoistic fervour.

The U.S. is currently increasing its borrowing at an alarming rate and while the arguments made above mean that no challenge to the dominance of the dollar and therefore its ability to borrow is feasible, it remains exposed.

Janet Yellen was confirmed as the first female Treasury Secretary yesterday just as she was the first female Fed Chairman.

One of the credentials she brings to her new role from her time at the Fed., is her preference for jobs over inflation. That will be music to the ears of current Fed Chairman Jerome Powell. It will be refreshing to have a Treasury and Central Bank working in harmony following what has gone before in the recent past.

The latest FOMC meeting starts today and the Committee, if members’ recent individual comments are any guide, is 100% committed to further monetary stimulus in support of the fiscal stimulus being discussed on the Hill.

There may be some change coming in the market’s view of the dollar.

It has been considered recently, as the dollar has corrected, that it is a buy on dips, but as vaccinations begin to take effect and the toll of infections and fatalities begins to fall, improving risk appetite may make it a sell on rallies.

The next two weekly unemployment reports and the January NFP will need to see a marked improvement before such a theory gains traction. Yesterday, the dollar index rose marginally to a high of 90.51 but was unable to hold onto the gains and it fell back a little to close at 90.36.

If Germany suffers, the Eurozone is in big trouble

It is difficult in the current environment to find anything positive to say about the Eurozone and the single currency. Yes, the euro is significantly stronger than it was a year ago but even that, far from being a comment on the economy is becoming a millstone around the neck of those members who want to export their way out of the current recession.

In the past, such a recovery would be centred around a weakening, possibly officially devalued currency, but that option has been snuffed out by Germany and its vice-like grip over the ECB and inflation policy. Now the economy is in contraction and the region is suffering from deflation.

The saying used to be that if the U.S. sneezed, the world catches a cold. Nowadays it is truer to say if Germany sneezes, the eurozone is close to pneumonia!

Yesterday’s release of confidence data saw the influential IFO index beginning the year appreciably weaker. While there is a degree of confidence in the industrial sector, driven mostly by reputation, retail has collapsed.

This is hardly a surprise, given the length of the current lockdown and the time when it was introduced which could not have been worse for both retail and hospitality.

The services sector has not fared any better with logistics badly affected by the lockdowns, while Brexit bottlenecks have also had a negative effect.

IFO’s commentary which accompanied the data sees little hope of any sort of recovery before H2 at the earliest. The current quarter looks like seeing the economy stagnate, while Q2 may see some marginal improvement over Q1.

The euro remains in a narrow range, unable to break above 1,2180 but well supported at 1.20. Yesterday it fell to a low of 1.2116, closing at 1,2141.

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.”