27 January 2021: Johnson facing Covid questions

Johnson facing Covid questions

27th January: Highlights

  • UK fatalities reach 100k with no end in sight
  • Yellen returns to the fray
  • Euro finally reacts to double-dip fear

Death toll to remain high, even as infections fall

Over the entire period of the Pandemic, the UK Government has grappled with balancing its effect on the economy with the spread of infections and fatalities.

With deaths attributed to Coronavirus passing 100k yesterday, it is easy to argue that they have not achieved either of their objectives. With deaths lagging infections and hospitalisations, it will still be weeks before any substantial improvement is seen despite the current lockdown and vaccination programme.

At almost every turn, the Prime Minister has been accused of indecision and delay and now appears to have decided to be more cautious, leaning towards ending the pandemic by ensuring that the lockdown remains in place for longer than may be considered necessary once the four most vulnerable groups have been immunised.

The balancing of the two major effects of the Pandemic has not been a unique issue for the UK. All across Europe there has been a similar dilemma with German Chancellor Angela Merkel admitting yesterday that the virus is still out of control.

Chancellor Rishi Sunak is now facing delivering a Budget at the beginning of March with the country still in lockdown although it is hoped that there may be a roadmap in place by then that will provide a path towards recovery.

A recession is now almost certain to return and both fiscal and monetary stimulus are necessary to boost growth.

Sunak has studiously avoided any mention of negative interest rates since it is an argument and decision that can leave the Bank of England. However, there is no doubt he has given his views in private to BoE Governor Andrew Bailey.

Bank officials have been bullish recently over the prospect of a recovery in the second half of the year, but yesterday’s grim statistic will have created more introspection and there is a possibility that both Bailey and Haldane could move towards the view held by independent MPC members that negative rates are a necessary evil.

Yesterday, the pound fell to a low of 1.3609 but recovered to close close to its days high at 1.3739. The break and close above 1.3720 could be significant and may open the way for an eventual move above 1.40.

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IMF lifts global 2020 forecast but still sees uncertainty

Jerome Powell will deliver yet another speech following today’s FOMC meeting in which he will confirm that the Fed is fairly sanguine over the prospect of rising inflation (despite a view among economists that the risk is growing), that the Central Bank stands ready to intervene in any way it deems necessary to ensure growth targets are met and finally calling upon Washington to provide greater fiscal stimulus.

He may also refer to the new Treasury Secretary Janet Yellen who was sworn in yesterday but his pleasure in her appointment will pretty much be taken as read.

Data for durable goods orders for December, a statistic that points to the long-term prospects for the economy since it refers to items with a long lead in time, will be released later today. It is expected that recent falls in orders will have slowed considerably with the data expected to be unchanged from November’s small increase.

The Fed’s interest rate decision will be the major event for the day with the Fed Funds Rate expected to be left unchanged, still targeting 0% to 0.25%.

Yellen’s arrival at the U.S. Treasury puts her front and centre of the economic storm that is currently battering the country. Her predecessor, Steve Mnuchin, appears to have solved the perennial Treasury issue of demanding other nations stop devaluing their currencies to gain a trade advantage by allowing the dollar to fall in a similar manner.

China has already taken advantage of the temporary state of flux in the Federal Administration by demanding that the U.S. ceases what it calls protectionism which includes the fall in the dollar which has seen the Yuan rise to a high of 6.43 this month when it was trading at close to 7.14 just six months ago.

While this has seen a marked improvement in the trade deficit, it has done nothing for U.S. exports to China, giving Beijing a legitimate reason to complain about an uneven playing field given Washington’s demands. With trade talks set to resume, this will do nothing for the continuing tensions between the two nations.

The dollar index appears to have resumed its recent falls following an insipid correction. Yesterday, it fell to a low of 90.11, having briefly tried to rally above 90.60. It closed at 90.18.

New variants yet to hit home

The IMF appears to have its sights firmly set on the Eurozone as a major factor in the recovery of the global economy from the Pandemic.

While the U.S.’ situation is not dissimilar to that of the Eurozone and worse in some ways the Fund knows better than to be too critical since via the World bank it is indirectly funded from Washington.

The IMF is concerned that the new variants of Coronavirus that have emanated in South Africa and Brazil have not yet begun to have the effect of slowing the recovery and the Eurozone while protecting itself is merely delaying the inevitable.

Angela Merkel the German Chancellor in the final throes of her term in office admitted yesterday that the virus is close to out of control as the country passed its own grim milestone of 50k deaths. She admits that mistakes have been made and that the rollout of the vaccine has been slow.

The EU Commission has issued a directive to pharma companies that it must be informed before large quantities of vaccine are shipped to the UK. It seems that the EU is concerned that vaccines produced in the UK are not being shipped to the mainland in the same quantities as movement in the opposite direction.

This is merely symbolic of the mistrust that exists following the protracted Brexit negotiations but requires goodwill and common sense from both sides as they have a common enemy.

Following poor economic data from German earlier, Mrs Merkel appears to have made the resolution of the holding to ransom of the budget and stimulus package by Hungary and Poland her final major contribution.

A resolution of the issue would be most welcomed in Rome and Madrid where they are desperately awaiting the two largest proportions of the additional funding.

Yesterday, the euro rose to a high of 1,2176, but there appears to be strong selling interest around this level as the single currency has consistently topped out here over the past week or so. It closed at 1.2167.

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.”