Recovery masking Brexit concerns
Morning mid-market rates – The majors
28th April: Highlights
- Sterling reaction to political row a factor of lack of drivers
- Markets hanging on Powell’s every word
- Timing of reopening still in question
Beware the inflation spectre, no one is safe
Following the Conservative Party’s victory in the 2019 election, it was clear that the Opposition Parties would spend the next five years with very little opportunity to affect policy and in these circumstances, the best they could do was snipe and disrupt.
Brexit afforded the perfect opportunity to criticize but the Prime Minister managed to pull a deal out of the dying embers of the negotiations. No matter that in the grand scheme that it didn’t satisfy everyone, that was always the nature of Brexit, but it has formed a basis for the Government to comply with the wishes of the electorate.
Now, Boris Johnson faces two entirely separate issues that will make him uncomfortable but little more.
First, questions are being asked about the refurbishment of the private apartment at 10 Downing Street and who paid for it. Second, Johnson is being accused of insensitivity over remarks made during a meeting of senior Cabinet officials, saying when arguing about the second lockdown that he would allow bodies to pile up in the streets rather than succumb to a second lockdown.
To vilify Johnson over remarks supposedly made at a private meeting is exactly the thorn in the side tactics Opposition Parties are forced to resort to, to get their voices heard. Insensitive? Yes. Serious? Hardly.
Of course, asking Party donors to pay for the refurbishment is wrong, if indeed that happened, but Johnson is more likely being deliberately obtuse in order to infuriate those accusing him of sleaze all the more.
There are two significant economic factors that deserve more airtime than spurious criticisms that will soon blow over.
The success of the rollout of the Covid vaccination has masked continued concerns regarding trade with the EU. Brexiteers continue to praise the fact that issues in the EU over the distribution of the vaccine illustrate that theirs was the right path while the reality is largely being ignored.
Brexit will still make inroads in the country’s GDP over the next three to five years. The fact that the Government seemingly believes that Brexit has been put to bed could return to bite them.
As an example, EU Commission President Ursula von der Leyen commented yesterday that the EU will not hesitate to act should the UK fail to comply with the treaty. The vote took place last evening in the EU Parliament on the final agreement and the result will be delivered this morning.
Rising inflation is the other significant issue facing the country. To simply dismiss inflation as a temporary side-effect of ultra-loose monetary policy could be a mistake. The BoE will need to be prepared to deal with falling GDP and rising inflation later in the year if the current trajectory of growth does not continue.
Without significant data releases this week, the pound is only marginally affected by the attempts to unsteady the Government.
It traded between 1.3858 and 1.3924 versus the dollar yesterday closing ten pips higher on the day at 1.3909.
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Fed committed to dual mandate
The basic fact that any meeting that has the potential to disrupt the economy in either direction, is important.
Later today, Fed Chairman Jerome Powell will deliver a series of remarks summarizing the discussion he had earlier with his colleagues to justify the actions, or lack thereof, of the Central Bank.
Official interest rates will be left unchanged and that will probably also be true of the QE policy. There is a very small chance that Powell will announce plans to taper bond purchases at some time in the future. Were that to happen, it would send the dollar much higher.
The odds heavily favour the Fed taking no action but providing advance guidance concerning its plans to tackle rising inflation.
If Powell remains coy about what the Bank has in mind, that will bring more volatility to the market. This is another consequence that the FOMC are trying to avoid.
He has already provided draft parameters concerning the likely level of inflation in the coming months and the period of time over which price rises are likely to remain elevated.
Activity in the U.S, economy is growing almost exponentially, and this will need without question to be addressed. A heavy-handed approach if delivered at the time of any unforeseen setback could have disastrous consequences.
Therefore, Powell will remain cautious and repeat his concerns over the ability of the economy to stand on its own feet for the time being.
This may not satisfy analysts and commentators, but it could easily depress the dollar further.
The index continues to form a ragged base centred around the 90.80 area. Yesterday, it rallied to a high of 91.07, but fell back to close at 90.87.
Countries relying on ECB a little too much
An almost blasé attitude had developed regarding the debt to GDP ratios of several southern nations who are members of the Eurozone, but now that the malaise is spreading to the more industrialized nations of the north the ECB will sit up and take notice.
France is drowning under a mountain of public debt as countries begin to rely a little too heavily upon the Central bank to buy their paper.
This could easily begin a vicious circle in which government bonds are issued and purchased by the ECB. The funds are then used to shore up an economy ravaged by the Pandemic and not for economic development and growth.
Eventually, interest rates will begin to rise but for now they will remain depressed.
At some point the cost of servicing that debt will begin to rise bringing calls for the ECB to either forgive some (or all) of its holdings or allow the maturity dates to be extended possibly indefinitely.
Another crisis waiting in the wings is the probable lurch of France to the right politically.
Not only in the country one of the more indebted nations now owing around Eur 2.75 trillion but it is likely that it is on the verge of political turmoil with President Macron expected to lose next year’s Presidential to long-term adversary and hard right candidate Marine le Pen.
Should that happen, the best the EU Commission can expect is for the country to oppose any expansion of the Union or closer fiscal ties, while the doomsday scenario of a Frexit referendum could be seen.
For now, the rollout of vaccinations is beginning to have a positive effect on confidence and yesterday, Germany, as expected, increased its estimate of 2021 full year GDP to 3.5%.
The euro remains in an artificially strong opposition. Yesterday, it clung to support around 1.2080 with the outcome of today’s FOMC meeting expected to have an effect on currency volatility.
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.”