28 August 2020: Sterling set for Euro gains

Sterling set for Euro gains

28th August: Highlights

  • Bailey to outline Bank’s continued support post-Government support
  • Trumps accepts nomination, lays into Biden
  • ECB to wait and see Q3 data before deciding full extent of support

Retail losses key to employment conundrum

Job losses on the High Street continue with food outlet Pret a Manger saying yesterday that it will shed close to 3k jobs. It is doubtful that this will be the last announcement with several firms likely hanging on while the Government’s support winds down.

This Monday marks the end of the official Eat out to Help out campaign. It has been a success with close to 65 million meals having been served and increased footfall reported in High Streets and malls. While the official scheme is coming to an end, several outlets are set to launch their own arrangements to continue to attract footfall.

The Federation of Small Businesses has labelled the scheme a lifeline and called upon the Government to extend it through September. It seems that Rishi Sunak’s thoughts are that he would be simply extending the agony if hospitality businesses are simply clinging on via the programme.

The full extent of the threat to jobs is not yet known but with only 1 in 5 office workers back at their place of work in some major cities, the effect on infrastructure will take some time to be known as this may be the shift in working practices that has been predicted for some time.

One area of the economy which is rebounding strongly is the property market. Estate Agents are seeing record activity with their official body reporting that houses are selling close to two weeks faster than they were pre-pandemic. Whether this is just pent-up demand or a part of a more structural shift as property owners have used the lockdown to review their needs, it is too early to say.

The pound is still reactive to the actions of the dollar but is gradually grinding higher versus the euro. Brexit talks continue to apparently go nowhere. The UK’s stance that it will revert to WTO rules if no deal is agreed by December is driving EU Representatives to more rhetoric and less negotiation as the UK’s fallback position gives them little leeway.

Yesterday, the pound closed at 1.3201 and 1.1167 versus the dollar and euro, respectively.

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Inflation target done away with as Powell focuses on jobs

What do you do if after ten years your target remains unachievable? In the Fed’s case you do away with the target inferring that it was no more than pie in the sky.

Jerome Powell, the Chairman of the Federal Reserve and more and more the star of President Trump’s appointees to Federal positions, announced yesterday that as a result of a review of monetary policy, the Central Bank will switch to an average for inflation rather that the 2% target that has been in place for some time.

Since inflation has become something of a sleeping beast since printing money became a legitimate monetary policy tool, the markets have been lulled into ignoring its effect as it has been constantly below target.

The effect of this shift in policy is that the Fed will allow prices to rise after a period of low inflation (as we see now) without rushing to hike rates. In practical terms this means that the U.S. is likely to see historic low interest rates for the foreseeable future.

This is the kind of certainty that markets prefer, and once traders come to terms with the fine print could see the dollar begin to rally. Clearly, the losers in this will be savers who may be forced into riskier investments to bag a return.

Last evening President Trump accepted te Republican nomination to stand as their candidate for election. While not announcing any new initiatives, Trump presented himself as the Law and Order Candidate. While he didn’t mention the latest flare-up in racially driven tension, he inferred that recent riots in several cities were primarily in Democrat held and Governed States.

The dollar’s reaction to the Fed actions was fairly muted with the market still having a week to go before the Labor Day weekend which marks the end of Summer. Coincidentally the NFP data is also released next Friday and that will have more immediacy for the market. Yesterday, the dollar index 92.41 and 93.32, cloning virtually unchanged at 93.01, nine pips higher on the day.

Further euro strength versus dollar unwelcome for exports

Earlier in the week it was reported that savings rates in the U.S. were rising at a significant rate as the population tried to repair the damage to their finances caused by the pandemic.

This phenomenon is now being seen in the eurozone and may have a more significant effect given that the support being given centrally is appreciably less than being seen across the pond.

ECB Governing Council Member and Slovakian Central Bank Head, Peter Kazimir commented yesterday that there is little point to basing actions to recover from the pandemic on Q2 data since it was so far out of line and since there is no hurry (some may disagree) to disperse emergency funding, a more considered approach should be used.

He went on to say that although the PEPP funds now total Eur 1.3 trillion, there is no rule that says it all must be used, and this should depend on the recovery as much as the original plunge into recession.

The Eurozone stands at the edge of a time where it has the opportunity to consider its future and whether it wishes to advance as a more Federalized group or continue to muddle through from crisis to crisis constantly waiting and seeing. The inability to make decisions that are both crucial and accountable continues to be the main stumbling block to advancement.

The euro cannot be taken as a serious contender to replace the dollar as the Global Reserve Currency while it is managed by a Central Bank that is continually forced to operate with one hand tied behind its back.

With rising infection rates across several larger economies of the region it remains to be seen what state the entire Eurozone will be in by the end of Q1 ‘21 if the period of consideration remains in place.

The euro rose to a high of 1.1901 yesterday but fell back to close barely changed at 1.1822.

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.”