27 August 2021: UK sees hybrid work as a positive

UK sees hybrid work as a positive

27th August: Highlights

  • Economy beginning to slow?
  • Fed. Presidents still calling for taper to begin
  • Lane sees EU as a major contributor to global expansion

Services firms beginning to embrace the change

The UK economy, which is primarily driven by the services sector, is likely to embrace the change to a hybrid model as the country emerges from the Coronavirus pandemic.

A report published this week shows that a majority of businesses where home working is possible are positive about a change. There is a degree of scepticism among trades unions about some firms taking advantage of the situation and trying to reap the financial benefits themselves by attempting to negotiate salaries lower.

The switch to home working has clearly been exacerbated by the Pandemic, but the advances in communication which have driven the move were coming in any event.

The jury is out regarding the benefit to work life balance versus the clear disadvantage to the social development that comes with having staff all in one place.

As the recovery continues this method of working will develop but for now the Government is likely to remain on the side-lines and allow a holistic approach to develop.

Today is likely to mark the last working day of the summer lull as next week sees the end of school holidays, which means the market will return to something approaching full strength.

The Bank of England will be keen to gauge the effect of the end of furlough payments to workers which is expected to see a spike in unemployment as firms that have become unviable, simply relying on Government payments to survive, go to the wall.

This issue is unlikely to be restricted to a sector or type of business and is more likely to weed out those with weak balance sheets or those who are over leveraged.

There are no major data releases in the UK next week, so traders and investors will continue to speculate about when the Bank of England will itself be able to begin to taper asset purchases.

The decision is two-fold. The Bank will take note of the progress being made by the economy by analysis of the data, but there will also be a degree of how the data is viewed by MPC members that will affect how they vote. The next MPC meeting is taking place on September 23rd.

Yesterday, the pound fell back to a low of 1.3689 as the dollar bounced off support. It closed at 1.3699.

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Fed Chair unlikely to change path

By his own admission, Fed Chairman Jerome Powell is particularly using inflation and employment data as measures of the progression of the U.S. economy towards a complete recovery from the Pandemic.

The problem with such a relatively narrow view is that there are several outside influences that are muddying the waters.

First the exceptional level of support that has been pumped into the economy has driven inflation higher, although it appeared to be levelling off a little following the latest figures for CPI.

Outside influences like the rise in the oil price due to additional demand as lockdowns are withdrawn has added to costs of transportation.

The recent surge in creation of new jobs is being treated with scepticism is several quarters, with data for jobless claims seen as being more relevant to the recovery.

The weekly data has reached something of a plateau around the 350k new claims per week, with the rate of change slowing considerably.

The data released yesterday for the ending August 20th, showed that there was a small upwards revision to the previous week’s numbers and a marginal increase to the latest figures.

Powell and his colleagues on the FOMC continue to insist that they are not influenced by one-offs and look at the trend in the data. It is fairly clear that they also look at the rate of change and will have seen that rate in jobless claims slowing.

However, the current level is still well above the long-term average.

The market remains bullish about the number of new jobs created, which has threatened to break the one million mark, without quite getting there over the past couple of months. Initial estimates for the August headline are between 750k and 850k new jobs having been created.

With next week marking the end of summer with Labor Day on September 6th, reaction to today’s speech by Powell at the Jackson Hole Symposium may be slightly exaggerated but since he is unlikely to deviate from his recent path, the likelihood of a significant reaction is minimal other than to confirm the dollar’s recent trend.

Yesterday, the dollar index managed to rally back above the 93 level, reaching 93.08 and closing at 93.06.

Activity date belies economist’s confidence

In the absence of ECB President Christine Lagarde, who clearly takes the French tradition of taking a summer holiday lasting for the whole of August seriously, The Central Bank’s Chief Economist Philip Lane has taken on the role of head cheerleader for the eurozone economy.

Having talked down the negative effect of the Delta Variant of the Covid-19 virus on the economy,

Lane spoke yesterday of his optimism for the global economy and his expectation that the Eurozone will not only be a part of significant global growth, but that the ECB will be at the forefront.

While that remains to be seen, this degree of positivity is both unexpected and also possibly a little over optimistic.

The period of time when the Bank will continue to support the economy may produce data which show that the recovery is becoming firmer, but a lot will depend on how that support is replaced, as Lagarde has already said it will, and the reaction of stronger Eurozone economies who will not want to see financial support cast in stone.

Lane was in a positive mood, extolling the virtues of the Union’s robust vaccination programme that is keeping delta infections at bay. This is more than a little ironic since just a few months ago, the region was suffering from a shortage of vaccines and gaps in its ability to deliver them to where they were needed most.

Lane confirmed that there is agreement within the ECB’s Governing Council that interest rates won’t be raised until inflation is consistently at or just above 2%

He didn’t mention just how close the vote on that change in policy was.

The ECB could face a tricky period between now and the end of the year as it will face calls for a reduction in support should inflation begin to look like getting out of control as winter approaches.

The continued support being seen for the dollar pushed the euro lower again yesterday.

It fell to a low of 1.1746 in quiet trading, closing at 1.1752.

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.”