Uncertainty dents budget hopes
27th February: Highlights
- Possible budget disappointment hits Sterling
- Dollar index continues to receive risk appetite boost
- Germany looking to open the fiscal tap
1.30 level attracting sellers for now
The rumours of a fiscally expansive budget have ground to a halt to be replaced by rather more realistic expectations. The Chancellor, Rishi Sunak is not short of excuses for why the budget may contain less investment than had been expected recently. The spread of Coronavirus remains a major concern across the entire globe.
New cases outside China are beginning to outstrip those announced at the original source. The Brexit trade talks are another issue that may impact the Government’s desire to invest, particularly in large infrastructure projects which may not have any effect for many years.
While the economy continues to perform reasonably well, Sunak may wish to get his feet under the table before he starts to make a name for himself. Of course, the rumours persist that Prime Minister Johnson has surrounded himself with a group of poodles, and he and chief advisor, Dominic Cummings are pulling the strings.
Yesterday, former Chancellor Sajid Javid accused Cummings of a rule of terror, in which senior advisors and long-standing civil servants fear for their jobs.
The fact remains that despite ten years in power, either solely or in coalition, the current Cabinet is one of the most inexperienced in many years. The jury is still out on how effective it can be.
Yesterday, the pound suffered from its own issues and continuing support for the dollar. It also fell versus the single currency which illustrates the market’s current concern over the budget. Versus the dollar it fell to a low of 1.2896, closing at 1.2906, having earlier briefly traded above 1.30. It seems that level is now a line in the sand for potential sellers. Against the euro, it reached a low of 1.1844, closing at 1.1859.
Fed unlikely to stimulate economy unless virus concerns grow
Having pronounced himself happy with the country’s measures to protect itself despite previously saying that the borders leak like a sieve he has handed the task of making sure the protective measures are both adequate and effective to his Vice President Mike Pence. Pence thus becomes the fall guy should things get worse.
Vice Chairman of the Federal Reserve, Jerome Powell’s deputy, Richard Clarida has commented that he doesn’t see the global effect of the virus to impact the U.S. economy sufficiently to warrant a cut in rates although he, his boss, and their colleagues on the FOMC remain cautious about the prospects for the global economy.
The U.S. is far from immune to the current crisis and as and when things start to improve a strong dollar is not what either the U.S. of its trading partners will want.
The dollar index faces strong selling pressure at and above 99.40 but there is a strong feeling that it remains the safest of safe havens with Japan at the epicentre of the situation and Switzerland the other major safe haven sharing a border with Italy, the most affected European nation.
The effect of the concerns on Global Markets would have been expected to see a larger fall for the dollar versus the Jpy in normal times but for now Japan remains in virtual quarantine.
Yesterday, the dollar index 98.91 and 99.27, closing at 99.15 as traders are reluctant to take on any large positions fearing a flash crash if the news suddenly turns bad
Germany to provide support (to its own regions)
In Germany, fiscal caution and budget surpluses are built into the constitution and it is illegal for deficit financing to be adopted. Thus, the country runs a budget surplus which, when it was independent, made the country one of the strongest in the world.
Having been a major political force and a significant instrument of change under Chancellor Angela Merkel, Germany is now considering looking to get its own house in order first.
Its Finance Minister, Olaf Scholz is considering removing the debt brake a piece of legislation enshrined in the constitution to use the budget surplus to help the approximately 2.5k towns that are struggling to deal with their debt burden.
It has been said many times, even here, that Germany needs to loosen its purse-strings a little and that could be about to happen. However, it will take a considerable time for any benefit to flow to the other Eurozone countries while they await Germany putting its own house in order first.
Yesterday, the euro traded in a narrow range between 1.0908 and 1.0855, closing just five points above the opening level.
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.”