Brexit & Covid joining forces
29th September: Highlights
- This could be a long quarter for the UK economy
- Senator to oppose dangerous Powell
- Doors open to higher inflation
Economy facing a slew of bad news
This began with Brexit negotiations that were ongoing when Johnson took over from Theresa May. Continued through almost every stage of the Pandemic and now, faced with both the wholesale gas price increase and the HGV driver shortage.
In many cases Johnson and his Ministers appear to be quick to comment, almost without either thinking or having all the facts to hand, but slow to decide a course of action.
The number of changes that have had to be made to policies that have clearly not been thought through is bordering on the farcical.
With an opposition that is in danger of being torn apart by infighting, the outlook for the country over the short and medium term is a major concern to investors and potential trading partners.
The way in which President Biden pulled the rug from under any potential trade deal between the UK and U.S. is synonymous of the hopeful way the country is handling post-Brexit negotiations over trade deals
It could be argued that no Government could have made correct decisions about every crisis that has befallen the country in the recent past, but what is becoming unforgivable is the manner in which the continuing problems have been handled.
The boost that both the economy and the fight against Coronavirus received when the vaccine was developed has come close to being squandered, Ministers have come and gone through scandal and ineptitude which has brought the country to where it is now.
The Bank of England’s Monetary Policy Committee at its meeting last week was clearly aware of the dangers facing the economy, and the question of when the withdrawal of support for the economy will begin has again been deferred.
The fact that there were no dissenting voices when the vote on reducing support favoured no change is in itself telling, given the hawkish outlook of some members.
The current situation points to a tough fourth quarter for the economy, and the pound is beginning to reflect those concerns.
Yesterday, it fell to a low of 1.3521 versus the dollar, closing at 1.3541. Sterling also registered a significant decline versus the euro, falling to 1.1572 and closing at 1.1586.
Powell opposed by California Senator due to oversight
Looking at how the Federal Reserve has handled the economic fallout from the Pandemic, an observer could be forgiven for thinking that Chairman, Jerome Powell, would be a shoo-in to be confirmed for another four years by President Biden.
It seems that one of Powell’s only mistakes has been to be given the role by ex-president Trump.
It was announced yesterday that his nomination for renomination for the role will be opposed by Massachusetts Senator Elizabeth Warren, who has been fiercely critical of Powell’s record on deregulation of financial markets.
She commented yesterday that your record gives me grave concern. Over and over, you have acted to make our banking system less safe. And that makes you a dangerous man to head up the Fed.
It seems that Powell’s biggest crime is to be a Republican. Warren is the most senior lawmaker to voice a negative view on Powell, despite his predecessor and current Treasury Secretary Janet Yellen being a vociferous supporter.
Given Warren’s comments about Powell being pro-Wall Street, it is no surprise that the financial markets favour a continuation of the current regime, since an unknown quantity could undermine confidence.
While the renomination question is likely to be resolved in the coming weeks, the issue of the debt ceiling is now giving rise to concern. Janet Yellen yesterday warned that the country will run out of money if no action is taken by the middle of next month.
This has been an ongoing situation for many years, where Congress performs a degree of brinkmanship to show where the purse strings are held, but it all works out in the end. However, this year, there is a different feel to the situation, with Yellen saying yesterday that the country faces an unprecedented financial crisis if something isn’t done immediately.
The dollar index continues to rally, partly driven by the weakness of the pound. It is flirting with the top of its perceived range, with a target of 94.40. Yesterday, it reached a high of 93.80, closing at 93.72.
Lagarde wants the market to fix the gas issue
However, the regulation of price generally reacts to supply and demand and a rise of 250% so far this year, topped off by an 80% rise in August alone, is excessive for any market.
The reason for this has been an uptick in demand following the global recovery from the Covid Pandemic and an unusually cold winter in 2020/21 which has left reserves depleted.
Europe’s main supplier of gas is Russia, and no one can discount their hand in the issue given its record of dabbling in issues beyond its own borders. Although, this is no more than speculation.
The rise in prices has seen several peripheral gas suppliers go out of business, but the slack has been taken up by the larger firms, the result of which has been no break in supply.
Nevertheless, the price increase is sure to have an effect on inflation through the eurozone. This prompted Lagarde to confirm yesterday that it is likely that inflation will remain above 2% for the rest of 2021 and into 2022.
While the price may fall as supply and demand become better equalized, it is unlikely that it will return to levels seen at the end of last year and this may contribute to inflation being less transitory than had been perceived.
Lagarde has been on the front foot in driving ECB policy since the end of the summer holiday season and has faced the hawkish members of the Governing Council head on.
This has definitely been a contributory factor to the rise in confidence that has led to upgrades to growth expectations for Q3 and Q4.
The euro tested short-term support levels yesterday, reaching a low of 1.1668 and closing at 1.1683.
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.”