30 March 2020: Long-term concerns remain

Long-term concerns remain

30th March: Highlights

  • Sterling recovers as initial virus shock wanes
  • Jobs data concerns see dollar fall
  • EU Commission considering further stimulus

Every new package pushes recovery further down the road

The jury is still out on the medium to long-term effect of the measures the U.K. Government has taken to stave off the effect of self-isolation on those employed or self -employed.

Nevertheless, the pound has begun to restore a little order since the initial shock of the outbreak of Covid-19 turned into a pandemic although the unprecedented actions that have been taken by Prime Minister Boris Johnson and his Cabinet’s inner sanctum have brought about a degree of uncertainty not seen since WW2.

The lockdown of the population, only allowed to leave their homes for a few essential reasons, will clearly have a significant effect on the economy, especially the ability of businesses of all sizes to survive. The package of measures put in place by Chancellor Rishi Sunak will ease the pain somewhat but overall, the depth of the recession that awaits is impossible to judge.

Economic data is beginning to show the effect of outbreak on every aspect of life. This week, the UK will release figures for consumer confidence and manufacturing and services output. These statistics are sure to be affected by the outbreak and will be accompanied by Q4 GDP. This predates the current situation and will be largely ignored unless there is a major surprise in the figures.

Last week the pound managed to recover significantly versus the dollar and euro. This was mostly due to the correction of the dollar from its recent highs. Traders are not getting over excited about the rally and depending on this week’s data, a downturn could resume at any time. Over the week, it traded between 1.1447 and 1.2485. Closing at 1.2453. The start of the week in Asia has seen it correct a little, so far (05.15 BST) reaching a low of 1.2360. Versus the single currency, it has been a similar story. Over the week it traded between1.0652 and 1.1230. Overnight it has barely moved away from Friday’s close of 1.1179.

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NFP data to set the tone as virus deaths rise

The televised interview undertaken last week by Fed Chairman Jerome Powell has resonated in the financial far more than the almost daily press conferences being held by President Trump. While Trump’s overtly optimistic monologues appear to easily convert opinion and aspiration into fact, Powell was content to tell it like it is.

His view that the economy may already be in recession as the Coronavirus takes hold contrasts with Trump’s King Canute impersonation. The realism displayed by Powell brought home the seriousness of the situation but also conveyed a sense of realism and a staunch determination to succeed. He said the measures taken so far should provide capital to those businesses that are most affected, and that the Fed has further firepower to engage should it be necessary.

The $2 trillion of measures agreed between the Treasury and Congress were signed into law on Friday as the country became the epicentre of the global pandemic. Data emanating from China has shown that new cases of Covid-19 are diminishing but it remains to be seen how quickly the economy recovers although Chinese actions cannot be considered as a template for the west.

This week will see the release of the employment report for March with analysts unable to bring themselves to contemplate how bad the data could be. Given the jobless claims figures released last week the data will certainly move into negative territory but it is almost impossible to judge just how far.

Last week the dollar index corrected significantly. It fell from a high of 102.82 to 98.25, closing at 98.35.

Huge rift developing as nations self-isolate

The Coronavirus Pandemic with its epicentre in Northern Italy is well on its way to decimating the entire Eurozone economy. There is a wide, and widening, gap between how it is affecting every country. Italy and Spain are by far the worst affected with Germany’s ratio of infections to deaths is significantly lower. France stands somewhere in the middle but economically it is firmly in Italy’s camp in calling for the issue of Coronabonds to provide pan-eurozone relief.

Italy’s economy is certain to be devastated with Spain not far behind. Spanish Prime Minister Pedro Sanchez told other EU leaders that the “European project” is at stake, while Italian Prime Minister Giuseppe Conte questioned whether the EU was truly committed to every nation’s survival.

The backlash from those nations most affected is unlikely to subside even as Italy sees its second day in succession where deaths have fallen.

The socio-economic reaction to the entire pandemic will be severe with the region again split between the northern and southern states with France this time in the southern camp.

It will take a major effort when the entire situation calm’s sufficiently for rational thinking to take over from emotion for the region to survive. It is certain that there will be a long and difficult review of the EU’s raison d’etre echoing Ursula von der Leyen’s comments about the region’s ability to be more than a fair-weather Union.

Today kicks off an important week of data with consumer confidence and economic sentiment set to be released. Neither will make pleasant reading. These figures are followed over the week by inflation, manufacturing output and unemployment. Services and composite output data will be released on Friday accompanied by retail sales as the new month sets the tone for how the economy will fare.

The euro remained in the thrall of the dollar last week as it recovered from its recent slump. It rose to a high of 1.1147, having fallen to a low of 1.0636, almost completely eradicating the previous week’s slump.

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.”