Sterling unlikely to rally much further
29th March: Highlights
- UK Begins to emerge
- Rates will have to rise eventually
- Upbeat speeches being failed by the data
Dollar strength to overshadow G7 currencies
There has been a lull in the belligerence of the EU over vaccine exports. They have realised that the UK is possibly innocent of any underhand tactics over vaccines having been able to take a quick decision rather than commit the entire process to a series of committees.
The economic recovery from the Pandemic will take another step forward today as restrictions on individuals are relaxed and the rule of six returns. This will be the prelude to the reopening of non-essential shops in two weeks’ time. That will be the acid test for several sectors of the hospitality industry.
There is a threat to the recovery from the new strains of the virus currently affecting mainland Europe, but the fact that the UK is so far ahead of the game with regard to vaccinations it is hoped that any increase in cases will not lead to an increase in either hospitalization or fatalities.
While the pound receives a boost from advance guidance from the Central Bank, improving data, including employment, and continued traction brought by the success of the vaccination programme, the dollar, driven by the Biden Plan continues to threaten any further advances.
Michael Saunders, a long-standing member of the Monetary Policy Committee commented last week that the Central Bank has several more weapons in its armoury to combat any soft spot in the economy.
He went on to voice his concerns regarding the rate of unemployment remaining above 5% and the influence of the reopening fading which could see the need for additional action. This is a veiled reference to negative rates.
The pound was reasonably well supported last week but was unable to make much progress against a surging dollar.
It traded between 1.3877 and 1.3670, closing at 1.3786. 1.4000 is looking a long way away now.
FOMC Member Harker still sees low rates as necessary
This is clearly a matter of opinion regarding a situation that is a once in a generation event and therefore, as Harker said, the outcome is situational.
Harker still used the term herd immunity, something that has to a large extent been discouraged in describing how long it will take until a sufficient number of citizens have been vaccinated.
H went on to slightly contradict himself by saying that he is content for inflation to be above 2% for some time.
That seems to be the team view of the FOMC and is unlikely to change in the coming months.
The longer-term prospects for the dollar are closely tied to the performance of the economy. This is something that hasn’t always been the case over the past few years.
Risk appetite has been far away the most prominent driver of the greenback, but that seems about the change.
The readiness of the Biden Administration to allow the level of public borrowing the rise significantly together with the stimulation that the economy will receive will see the dollar rise until rates start to rise,
It is hard to tell where the first crack will appear in the facade of Central Banks, who want to keep rates low, will appear. They may enter a game of chicken over who is the most concerned about inflation but cannot raise rates without damaging growth.
With FOMC members appearing to be sanguine about inflation rising above and staying above 2% the economy appears to be set fair with asset prices continuing to rise for the foreseeable future.
Last week, the dollar rose to a high of 92.81, closing at 92.72. With the NFP data being released this week the index could easily threaten resistance at 93.20 which could open the door to its medium-term target of 94.40.
Germany is in a mass state of confusion
Angela Merkel commented that she wanted to do away with her edict that Easter should be a quiet event. The opening of certain parts of the economy has been contradicted by German Scientists who have said that rates of infection have risen exponentially over the past few weeks.
The continued tensions across the entire region must lead, once the dust has settled to questions being asked about the future of Ursula von der Leyen. Since she is a Protege of Merkel, once the Chancellor departs, von der Leyen may find her position becomes untenable.
Since the inception of monetary union, the EU has tried to create a system that doesn’t have an overall command. The EU Commission, EU Council and EU Parliament, rather than working in harmony appear to be driven by rivalry.
This is exacerbated by the fact that each nation sees itself as independent of Brussels while it has to produce its own fiscal policy despite working within the growth and stability pact.
It is likely that once the entire pandemic is over that Brussels tries to reinstate budgetary controls, several States may then opt out.
Meanwhile, German leading indicators appear to predict an improvement. Indexes of confidence are beginning to rise.
Business Confidence is at 96.6, the current assessment is at 93 while expectations are at 104.
While that data is encouraging, the official estimate for the Eurozone economy is that it will contract by 0.7% in Q1. That seems a fairly confident estimation with other analysts expecting the contraction to be above 1%.
Last week, the euro fell to a low of 1.1761 versus the dollar. That is close to threatening medium term support around 1.1740 which if broken would open up 1.1610.
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.”