27 May 2021: BoE to favour UK only banks

BoE to favour UK only banks

27th May: Highlights

  • Banks beginning to join in the recovery
  • Markets looking forward to June data and Fed
  • Market takes a breath as it considers next move for euro

Cummings vicious attack unlikely to change the narrative

The Bank of England has begun to consider how the UK’s banking market will look post-Brexit as it waits to see the effect of the Pandemic on the wider economy.

Capital adequacy regulations are being considered with banks that retrench back into the UK being required to allocate less capital to their domestic operations and thus being able to increase lending.

This will be in line with what was happening pre-Pandemic across Europe as banks looked to concentrate on core businesses, relying less on more capital-intensive areas like trading financial assets.

This should provide companies that are cash hungry as they begin to reopen following lockdown to access facilities to support their operations until cash flow becomes more settled.,

The Bank is also looking at the traditional City of London involvement in the insurance sector, encouraging further investment in what has always been a mainstay of the market.

Former Chief Advisor to the Prime Minister Dominic Cummings launched a blistering attack on the Government’s handling of the early days of the Pandemic when he appeared before MPs yesterday to answer questions about mistakes that were made at the time.

Cummings was particularly harsh on the Health Secretary and Prime Minister in an attack where he seemingly exonerated himself from his own part by simply apologising.

This is another example of the impotence of any attack on a government that has such a huge majority.

The Government immediately confirmed that all such issues as raised by Cummings will be dealt with in the fullness of time as an official enquiry will take place next year.

The market has fallen into something of a lull as investors await the effect of rising inflation. The pound lacks sufficient support to test what has now become strong resistance above the 1.42 level versus the dollar while support remains until the index begins to move away from its recent lows.

Yesterday, the pound traded between 1.4175 and 1.4112, closing at 1.4121.

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Next week’s NFP to set the scene

With a surfeit of live data to go on, traders and investors are beginning to speculate about how the data due for release over the next month is going to influence the FOMC which meets on June 16th.

Jerome Powell has already said on several occasions that the Central Bank will only look at trends within the market as it looks to taper its purchases of Government debt, leading to a rise in interest rates to more normal levels.

Employment has become the major focus of attention with the data for non-farm payrolls seeing wild swings over the past few months.

Speculation that it will take longer than expected for the jobs market to return to normal is supporting the Fed’s wait and see attitude. While this has seemingly been accepted by traders, they are concerned at the peaks and troughs that are being seen from which a trend is impossible to discern.

Jobless claims numbers have been a little more reliable over recent weeks with both the four-week average and the headline number trending lower.

This clearly means that the recovery has firmed irrespective of the stimulus that has been injected into the economy as firms begin to discern a need for staff to be retained.

Market focus on the June FOMC meeting is likely to ultimately lead to disappointment as it is still too early for Powell to provide more advance guidance than he already has about the start of tapering of support measures.

There is a concern amongst regional Fed Presidents who make up the Committee that the recovery is not yet either sufficiently robust or wide ranging geographically to allow for any change in policy.

The dollar index has entered a regrouping phase as traders consider it too low to sell, yet too early to begin to recover.

It is now ingrained in the market’s psyche that no recovery will take place until the Fed at least provides a more hawkish outlook for monetary policy.

Yesterday, the index trod water between support around 89.60 and resistance at 90.20. It rose to 90.18 and closed close to its high at 90.05.

Week free of significant data gives euro a chance to regroup

As with other major currencies, the euro has become relatively becalmed as the market awaits more tangible signals that the recovery is solidifying, and the Central bank is on the verge of changing monetary policy.

Throughout the Pandemic, the ECB has been fairly passive in its reaction despite continuing and recently increasing its Government Bond purchases.

The challenges that have been made in German courts about the legality of this process have now been settled but questions still remain about the effect of the slowing of the process and what will happen when the ECB begins to shrink its balance sheet.

It is doubtful that the ECB will be able to divest itself, even over an extended period, of its entire portfolio, so questions will be asked about the long-term outcome of tapering.

Germany will not want the Eurozone to be seen as being responsible for a redistribution of wealth with the country itself on the verge of political upheaval as Angela Merkel steps down after several years at the country’s helm.

There is no doubt her departure will leave a void. The question now is will that void be filled by a politician with similar views, or has the Pandemic brought about a shift to the right as has been seen in traditionally more militant France.

Despite French militance, any shift to the right in Germany will be far more serious for the entire EU given the country’s past.

Economic confidence is growing in Germany and as with most trends in the region this is likely to spill over into other economies.

Concerns remain about when relief funds will be released. Italian Prime Minister Mario Draghi has authorised further bond issues as the country awaits a payment of Eur 200 million. He is now sitting outside of the European hierarchy wondering where the delay is coming from.

The euro followed the dollar in treading water yesterday, falling to test support at 1.2180 and closing at 1.2191.

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.”