2 March 2021: Broader access to welfare in Budget

Broader access to welfare in Budget

2nd March: Highlights

  • UK household savings rates boost likelihood of recovery
  • Manufacturing growth spurs jobs optimism
  • EU content with slow steady recovery

Sunak to support as many as possible

Details are emerging of just the type of Budget Rishi Sunak will deliver to Parliament tomorrow.

The emphasis will be on welfare, support and ensuring that the nascent recovery is able to flourish.

The success of the vaccination programme has been a gift that the Prime Minister can leverage to allow the economy to be well on the way to pre-Pandemic levels of growth before the inevitable tax increases have to be invoked.

Johnson confirmed yesterday that the vaccines that are currently available to NHS England are each viable against new variants of the virus. The incredible pace of the vaccination programme will continue with at least twenty-five million people being offered the jab well before the end of this month.

Between Johnson’s four-stage plan for the easing of lockdown and a suitably expansive Budget from Sunak, there is a growing sense of optimism that the UK will emerge from the pandemic in a strong condition relative to the rest of G7.

The discussion regarding the need for negative rates rumbles on. Bank of England Deputy Governor Dave Ramsden spoke yesterday of the modelling and testing that the Bank has been undertaking as being no more than contingency planning.

There is no doubt that there will be a response from one (or more) of his independent colleagues on the MPC who believe that it is far more likely to be necessary to introduce the measure.

Ramsden spoke of his concern that with the household savings rate having gone through the roof during the Pandemic, negative rates would push savers to spend since they will receive no interest and the inflationary effect would negate the benefit and hasten higher inflation which could already be on the horizon.

The market has become less sensitive to comments about the nuances of policy, determining its view of Sterling based on more wholesale drivers, this is nurturing the view that the recent falls in the value of Sterling versus the dollar are a correction and will prove to be healthy and lead to a further rally down the road.

Yesterday, the pound corrected further versus the dollar. It fell to a low of 1.3870 closing at that level.

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Strong dollar encourages imports

The importance of the whole employment situation in the U.S. that will be highlighted by this week’s employment report for February is being exacerbated by comments coming from both the Fed and Treasury.

While the U.S. has a degree of responsibility not to artificially devalue the dollar due to its status as the global reserve currency, there is a growing belief that the strong dollar policy that has underpinned U.S. policy for decades is neither suitable nor viable for today’s world.

The purest reason for a currency to be weak or strong relative to others has always been a country’s trade balance which also determines safe havens.

There will be no change to the status of Japan and Switzerland in this regard, but the U.S. wishes to withdraw.

Manufacturing output in the U.S. remains strong and will be a minor creator of jobs in the current environment, but industry is dwarfed by imports. This has sprung from major businesses moving manufacturing overseas to take advantage of cheap, less militant labour and this, close to irreversible trend is now seriously damaging the economy of the U.S.

A weaker dollar will raise the price of imports and, it is hoped, encourage manufacturing to return.

This is not an overnight quick fix; it will take a generation for any reversal, but the current Administration recognizes that a start needs to be made as it reverses the focus of the previous President.

As and when Jerome Powell steps down, it is likely that President Biden will return a female to the role of Chairman of the Federal Reserve.

Lael Brainard is a technocrat, in a similar vein to Mario Draghi. She has been on the board of Governors at the Central bank for seven years, is less outspoken than her colleagues from Regional Federal Reserves but is a strong influence on policy.

She spoke yesterday of her concerns over the ability of the Fed to deal with crises such as the Pandemic which can stress the financial system. It seems that globalization sets off chain reactions to events that in the past would or could have been contained locally.

The dollar index reacted well to the passing of the Biden Plan, rising to 91.24. It will need a close above 91.60 to confirm that the rally has further to go.

ECB to provide support as long as it takes

Finally. The ECB has acknowledged that while the Eurozone economy will eventually recover from the Pandemic, its systemic flaws mean that the recovery will take longer than in other G7 nations and may not be as strong as is seen elsewhere.

One advantage that the Union has is the strength and capability of its manufacturing but that is and will remain more niche than wholesale when compared to the output from Asia.

The one area where the EU excels across a wide range of its members is in vehicle manufacturing although several of the volume manufacturers are in the hands of Japanese manufacturers and subject to their control.

German inflation data was released yesterday and as referred to already this week, the Bundesbank and Finance Ministry are determined to retain control over prices.

Inflation was unchanged in February at 1.6%. Although this contributes to the below target inflation rate across the entire Eurozone, there is a concern in Berlin that it won’t fall any lower before pent up demand is released as lockdowns are lifted leading to a rise that could quickly become out of control.

It is like that Jens Wiedemann the Bundesbank President feels he cannot trust the ECB to deliver low inflation growth although he may be prepared to accept higher inflation provided there are controls in place.

The President of the Banque de France sided with his more liberal colleagues at the ECB in comments made yesterday. Francois Villeroy de Galhau spoke of the need for flexibility in deciding on the use of various instruments. He even discussed a further interest rate cut which will have sent shivers through several EU capitals.

The euro reacted to the continued recovery of the dollar index. It fell to a low of 1.2015, closing at 1.2020. By comparison with Sterling, the euro appears to be in a more critical position technically given the proximity of major support.

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.”