Vaccine gains set to continue
26th March: Highlights
- Sterling to defy dollar strength
- Average inflation rate of 2% is still the Fed’s target
- Merkel optimistic over end to Pandemic
UK remains well ahead of other G7 nations in vaccinations
First, next week the restriction on the number of people who can meet outside will be eased, then on April 12th all non-essential shops will be allowed to open.
Economically the first quarter is likely to be a washout as businesses have been unable to operate for the entire period. However, Q2 is likely to more than make up for the slowdown by producing possibly the highest month on month turnaround since records began.
The easing of tensions between the UK and EU over delivery of vaccines will provide a short-term benefit to the economy. Other than the U.S. where the level of stimulus is far higher the UK is set to outperform all its G7 partners.
Recent surveys illustrate the willingness of companies to begin to invest in their businesses as the country begins to emerge from lockdown.
Prior to the beginning of the vaccination programme, there had been a fear that the UK would fall behind most of its competitors as more waves of infection combined with concerns over Brexit to hold the economy back.
Following a tentative agreement to share both information and resources regarding vaccines, the UK appears to have found a level of confidence that was unexpected to stand up to the EU Commission with French President Macron admitting that the Union got itself into a muddle with indecision and delay.
As already mentioned, the pound continues to hold its own in the face of a strengthening dollar, trading between 1.3670 and 1.3745 yesterday.
That impression of strength is confirmed in the pound’s continued rise against the single currency. It hit a high of 1.1680 yesterday, closing at 1.1674. Any further strength may begin to hurt UK exports to the Union.
FOMC has a framework for handling inflation
Leading indicators for activity of business confidence have performed above expectation as the country looks forward to a Q2 that will see the economy come close to reaching the level it was at pre-pandemic.
The U.S. has lived through a tumultuous year since the Pandemic first hit with then President Trump first decrying the epidemic then trying to play catch up.
The effect of the Capital Riot did a lot to weaken the country’s resolve, the fact that President Biden was prepared to throw money at the issue means the jury is still out on his ability to drive the country forward over the entirety of his first term.
The nature of politics in the developed world means that countries are prepared to throw out the baby with the bathwater in performing a political volte face in elections.
This was certainly true last November no matter how tight the result was in the end. The UK was the last G7 nation to retain its Government in its 2019 election. France is looking likely to continue the trend in its Presidential Election next year.
Biden’s pairing of Janet Yellen as Treasury Secretary with Jerome Powell at the Fed may have been luck of possibly a masterstroke.
Biden has a habit of allowing his team to do the jobs they were given without interference. That is another welcome change. Biden is set to make a keynote speech on the economy next week and is likely to announce more, but longer term, help for the economy this time though a major infrastructure program to promote both jobs and activity.
The Fed remains totally supportive of the economy but is getting a little side-tracked over the prospect of higher inflation. Both Powell and members of the FOMC agree that there will be a blip towards higher inflation, but the average will remain close to the 2% target.
The dollar continues to push higher but in manageable steps. Yesterday, the index rose to a high of 92.91, closing at 92.88. There is clearly some resistance around that level, and we may see a shallow correction which may test 92.60 or even 92.60.
ECB Official – Contraction to last at least until of H1
The lessons appear to be being learned with a conciliatory stance being taken over the row with the UK over vaccines with trade driven economies like the Netherlands seeing the pitfalls of a continued militant stance.
A prominent member of the ECB’s Governing Council Luis de Guindos acknowledged that the economy would continue to contract throughout the entire first half of the year.
The third wave of the Pandemic which is causing further lockdowns, Belgium became the latest country to renew restrictions yesterday, will see nations struggle to reopen for the Spring Season, while restrictions on travel brought in by the UK will undoubtedly continue the threat of a third winter for the travel and hospitality industries.
German Chancellor Angel Merkel appears to be taking a gamble over the third wave commenting yesterday that it is merely a reaction to the new strains of the virus, and they will be slowed by the continued improvements in vaccine delivery.
She went on to say that Germany can see the light at the end of the tunnel regarding lockdowns. That appears to be optimistic in the current environment.
In a move to confirm long-term support for the economy, another member of the ECB’s executive board, Isabel Schnabel, commented yesterday that the Central Bank would increase its purchases of bonds as part of its PEPP programme in the second half of the year.
While this will ensure that liquidity is plentiful, it will do very little to stimulate growth.
The euro continues to suffer in the face of the strengthening dollar. Yesterday it fell to a low of 1.1761, closing at 1.1764.
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.”