30 July 2020: Brexit trade deals being agreed

Brexit trade deals being agreed

30th July: Highlights

  • Sterling rally extends through 1.30
  • Shaky economy still needs Fed support
  • Banking sector, the forgotten danger

Sterling rallies as dollar fall resumes

The pound is continuing to rally against a dollar which has barely reacted to the entirely predictable Fed meeting. As the euro stalls, the pound is continuing to make ground. This is most likely due to the much larger short Sterling positions that have been being reported by the CBOT.

As commentators (myself included) try to either call a top or examine reasons while it cannot go on, the pound’s rally carries on serenely. It is now reaching close to fair value given that the last time it was at this level was only in March this year, while the euro’s recent high was last seen almost two years ago.

While it is to be expected that a post-Brexit trade deal will be competed fairly routinely with the U.S., despite talk of sell offs in the NHS and chlorinated chicken, it is deals likely to be made with other major partners, like Japan and Australia that are likely to give the pound further wind beneath its wings.

There are still several headwinds that will compete with the current surge of buying interest. There is no guarantee over the final Brexit outcome and the simmering row with China could burst into life at any time.

In the meantime, the pound is benefitting from the UK’s seeming foresight in acting as it has over a second spike in mainland Europe which is only now being picked up upon.

This rally may have had its roots in BoE Chief Economist Andy Haldane’s comments over a V-shaped recovery which is certainly better than the U.S. and possibly the Eurozone will be able to muster.

As data is released which shows how several areas of the economy are faring, the picture will become a little clearer.

Yesterday, the pound touched a high of 1.3007, although it was unable to close above that psychological level ending at 1.2995.

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Powell confirms further aggressive help

The meeting of the Federal Reserve which ended last evening acted exactly as the market had expected. Having said that, it would be hard to imagine any other result given the way the economy has been faring since the last meeting.

At that meeting Fed Chairman Jerome Powell signalled a period of contemplation. That period came to a sudden end as many States failed to get on top of the Covid-19 Pandemic while the economy faltered, and Congress considered what it would do about unemployment support.

The first round of support expires tomorrow and while there has been no official word as yet, it seems very likely that there will be a swathing cut in what those whose jobs have been lost due to the outbreak can expect to receive.

At his post-meeting press conference, Powell commented that the economy will need prolonged help if it is to avoid a long and damaging recession.

One thing that is certain is that President Trump is not going to have a buoyant economy to rely on as several columnists are already preparing his political obituary.

Powell also commented on unemployment which he said remains well below the level of the beginning of the year. The market will now focus on tomorrow’s data for weekly jobless claims to see if last week’s rise was a blip or the start of a trend.

Powell admitted that the economy has turned around since March and April, but he was also concerned about how the virus will dictate the speed of the recovery. This is most likely a reference to the expectations of a vaccine which is unlikely to happen this year.

Following a breather, the dollar index resumed its fall yesterday as investors look elsewhere for a safe return. It fell to a low of 93.17 and it closed at that level.

ECB money tap ignored by suffering banks

The ECB has banned banks from paying dividends which will no doubt depress their share price and dampen their lending ability no matter how much liquidity is made available to them.

The measures announced by the Bank also mean that there can be no share buy-backs or excessive bonuses paid to senior executives.

While it is not in the nature of the market to feel any kind of pity for fat-cat bankers, it is hard not to feel a certain twinge, since in this instance, they are not necessarily to blame. They, however, were drowning in a sea of bad debt long before any of us could place a pin in a map to indicate where Wuhan was.

Although the Eurozone has fought off the Pandemic far better than the U.S. and this has led to a rally for the single currency from a low of around 1.0630 in late March to touch 1.18, the reaction to the second spike will be the acid test for its performance over the next three months.

If the pandemic does take hold again and the tourist season is wiped out, the size of the Relief Fund announced last week may be little more than a drop in the bucket.

Either way, at some point banks are going to have to act to cover their loan losses and grow their capital. Despite low interest rates, this is going to mean higher fees, more security demands, and higher spreads.

All they will need to do then is find borrowers confident enough to borrow outside the Federally guaranteed loans that are currently on offer.

Yesterday. In the wake of the FOMC meeting, the euro reached a high of 1.1806, but fell back late on to close at .1775.

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.”