29 October 2020: Sterling a bystander without Brexit

Sterling a bystander without Brexit

29th October: Highlights

  • Sunak to announce spending plans.
  • Fed running out of tools and patience.
  • ECB; Not if, but when?

Pound treads water as talks continue

The pound has found itself in the doldrums this week as there have been no announcements regarding progress in Brexit negotiations and the Government awaits results from its regional lockdowns to enable it to consider its next move to combat the second wave of Coronavirus.

Rishi Sunak announced a few weeks ago that he was abandoning plans to produce his budget and three year spending plans due to uncertainties caused by the Pandemic, but yesterday he confirmed that on November 25th he will present a one year spending review to Parliament.

This will have three main purposes; funding for the NHS, protecting jobs and ensuring that Government departments have sufficient funding to deal with issues arising from Covid-19. From this it has been deduced that projections show that new infections will be close to peaking at that time. This will provide a degree of certainty to those Ministries directly affected by spending on the Pandemic.

Two of the largest global economics consultancies each called upon the UK to ramp up spending plans and increase the tenor of the furlough scheme to ensure that the country doesn’t slip into a double dip recession as has been discussed for both the U.S. and Eurozone.

Such a review is no doubt taking place as part of Sunak’s plans and will depend on the first cut of Q3 GDP which will be published in the coming weeks.

The lack of volatility for Sterling this week has also been affected by a dearth of economic data releases and comments from Bank of England Officials. That should change next week with the MPC meeting for the first time since conflicting opinions were published regarding a move to negative interest rates.

In all probability however, any news will be swallowed up in the maelstrom produced by the U.S. election.

As ranges narrow for the pound versus the dollar, history has proven that when there is a breakout, it can be violent and volatile depending on the catalyst. If it is Brexit news, a negative result is likely to cause the largest reaction.

Yesterday, the pound traded down to 1.2916 as the dollar index bounced off support. It closed at 1.2983.

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Fears of an election challenge bring jitters

Given the players in next week’s U.S. election and President Trump’s giant ego, fears are growing that a narrow Biden victory accompanied by any voting anomalies real or imaginary will produce a challenge to the result.

This would doubtless plunge the country into chaos, delay any hope of a resolution to the Pandemic Support Bill and hasten a double dip recession.

At yesterday’s rallies, Trump slammed those states, mostly Democrat run, that are still in some form of lockdown or are considering new measures. Biden accused him of insulting the memory of those who have succumbed to the virus.

Today’s weekly jobless claims data will provide further evidence of the trend in employment. Last week was the first time that the data provided solid evidence of an improvement with new claims, existing claims and the four-week average all moving in the right direction.

Predictions for today’s data expect a marginal fall in initial claims but a more significant fall in continuing claims possibly down to 7500k from last week’s 8300k.

Were that to happen it would provide support to the dollar, although the first cut of Q3 GDP is also being released. A complete reversal of the Q2 figure of -31.4 is expected with Q3 likely to be above +30%.

The entire market is gearing up for one of the most important weeks for the economy in a considerable time with next week’s Election overshadowing an FOMC meeting and the October employment report.

Volatility is already rising but may fall away either side of the weekend as traders square up positions in order not to be caught backing the wrong horse.

Yesterday, the dollar index gained following a fall in risk appetite caused by a significant rise in Covid cases and the inability of politicians to agree a relief Bill.

It rose to a high of 93.64, closing at 93.45.

No surprise if ECB decides to hold fire

The ECB meeting which takes place today will consider two significant issues; an increase in the level of support for the economy given the rise in infections that is currently taking place, and any proposed change in how the Bank targets inflation.

It is ironic that the Bank appears behind the curve on one issue and is trying to get ahead on the other. Some might say that their focus is more than a little awry.

Both France and Germany announced stricter restrictions yesterday to protect their citizens from the rise in new infections that are gaining pace almost daily. Both will close bars and restaurants with Chancellor Merkel referring to the restrictions as lockdown lite. In both countries schools and other centres of education will remain open.

The single most important question is what will happen at the end of a month when both countries’ restrictions are due to end? Can they be confident that a circuit break such as has been suggested in the UK has worked. If they reopen and infections rise again, that will have a severe social and economic effect as it will be right on top of the Christmas period.

It will be a surprise to analysts and traders should the ECB do anything other than promise to remain vigilant today. Christine Lagarde celebrating one year in the job appears to have forfeit one of the most important Central Bank weapons, that of the element of surprise.

This is only to be expected from the large and unwieldy Governing Council which, by its very makeup, is unable to make quick, decisive decisions.

The euro fell back to challenge recent lows yesterday as the dollar rallied. It fell to a low of 1.1717, closing at 1.1746. Strong support is around 1.1690 and a consolidated break of that level could bring to an end recent thoughts of a rally to 1.20.

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.”