26 June 2020: VAT cut a blunt instrument

VAT cut a blunt instrument

26th June: Highlights

  • Brexit weighs on Sterling
  • Kudlow changes track
  • ECB looking for solution to German Constitutional Crisis

Opposition not able to suggest any alternatives

The most important factor for Chancellor Rishi Sunak to consider when deciding how to add further stimulus to the economy is the pace at which it can have an effect on the situation. It is no use putting plans in place that will gradually add a small percentage to growth yearly when the benefit needs to be immediate and highly visible.

That is what a reduction on the rate of VAT almost across the board is the perfect instrument.

It is a headline catcher that will be seen by consumers when studying prices, it will be immediate from one day to the next and it can be used to attract footfall into shops. An additional benefit is that it can be used to differentiate between online shopping and a visit to the High Street.

In the words of former Chancellor Sajid Javid, it will give consumers more bang for their buck.

While this is unlikely to be the only method used by Sunak to stimulate activity which knocks on into higher growth, it will serve as notice of intent

The Conservative Party are believers in lower personal taxation and see sales tax (or VAT) as the ideal manner in which to allow consumers to have better choices available to them in which to use the additional funds they have available if personal taxes are lower.

However, that is where Sunak’s plan runs into problems. In order to pay for a reduction in VAT in the long term, there is a real possibility that income tax will need to be increased in order to repair the hole in the country’s finances that the Covid-19 pandemic has created. It may be a much harder sell to the Party’s grass roots support unless Sunak is able to illustrate the benefits of levelling the playing field effectively.

Although no one is certain about the full effect of the pandemic, it is far easier to model the effect of Brexit in the economy and it is well-known that the further any deal between the UK and EU is from the current situation, the greater negative effect it will have. That is why the UK’s departure from the EU remains a significant driver for the pound.

Yesterday, Sterling trod water as traders remained unsure of the effect of the various drivers in the short/medium term. It traded between 1.2464 and 1.2389, closing virtually unchanged at 1.2418.

Considering your next transfer? Log in to compare live quotes today.

Spikes and hotspots don’t constitute a second wave

The other day I mentioned the use of longer-term data to drive short term investment decisions by traders. This affliction appears to have moved on to affect policy-makers too as Larry Kudlow, the White House Chief Economic Advisor changed tack from a belief that the economy is off to the races to saying that there will be no further nationwide lockdown in (what he called) localized infections from Covid-19.

As New York and New Jersey States as well as Connecticut requested arrivals from nine other States to quarantine themselves, Kudlow said that, although expert advice is to the contrary, there will be no significant second spike despite there being hotspots and flare-ups. These will need to be dealt with and the Federal Government will provide assistance.

Treating every day as a new issue rather than having an overall plan that takes in every possibility is one of the reasons why The Trump Administration is struggling for support or traction in the lead up to the November election.

A poll released by a West Coast University yesterday put Joe Biden’s lead of Donald Trump at 13% with Biden polling 50% and Trump 37%. While this lead is not unassailable, it is probable that the President will try to close it quickly and that will likely produce some short-term effect on the economic outlook.

The market is going through a period of introspection as the dollar’s significant global drivers are balanced against the likely domestic effect of Covid-19.

That is materializing in the form of concerns over employment going forward.

Just as the UK Conservatives are a Party of low taxation, so the Republicans are a Party of low State aid, certainly at a Federal Level.

However, the Administration is going to have to bite the bullet should next week’s employment report fail to live up to, even if it doesn’t match last month’s stellar bounce-back.

As traders consider the longer-term direction for the greenback, it remains within well-established boundaries. Yesterday, it reached a high of 967.59 and closed at 97.39.

Prospective Eurogroup heads vow to solve impasse

As candidates for the post of President of the Eurogroup, the body that determines member states joint responsibilities towards the euro, throw their hats into the ring, each seems to be aware of the issues that face the single currency and further, knows how to solve them. Maybe that knowledge should be passed to the members of the European Commission and European Council before it’s too late.

A week on since the summit at which the Pandemic Relief Fund was supposed to be discussed, agreed and distribution begun, there has been no significant movement. In fact, there seems to have been no developments at all.

A fairly instructive action taken by a single nation independently, has been the decision from Spain alone to allow tourists from the UK to travel to the country without having to quarantine for fourteen days prior to entry. This would have been expected to be a pan-EU decision, but individual nations cannot be expected to await the machinations of Brussels as their economies go down the drain.

Similar decisions are expected imminently from France and Germany but as is becoming the norm, we will believe it when we see it.

As the effect of the lifting of lockdown appears in the data from several nations and also the eurozone collectively, the economy still needs the positivity engendered by a decision on how funding will be made available for the currency to be placed on a firm footing.

Yesterday, the euro traded between 1.1259 and 1.1190 versus the dollar, closing at 1.1217.

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.”