30 September  2020: Bailey warns on economy and rates

Bailey warns on economy and rates

30th September : Highlights

  • Unusually uncertain economy heading for negative rates
  • Weaker, sicker, poorer, and more divided. Biden’s take on Trump years
  • Leisure and Transport drag on the Eurozone economy

GDP between 7% & 10% weaker than pre-Covid

BoE Governor Andrew Bailey injected a sense of reality into the UK’s potential recovery as he branded it inconsistent but slowly improving.

Bailey also added his take on the conversation around negative rates commenting that the media had read too much into recent comments. In conversation with the British Chambers of Commerce which mostly represent small and medium sized businesses, Bailey said that the structured engagement on the operational considerations of how negative rates would work are only at their beginning and there is far more work to be done.

This flies in the face of the comments made by MPC member Silvana Tenreyro over the weekend which led markets to believe that the outcomes modelled so far were providing a degree of optimism.

Bailey’s comments are more in line with those of his Deputy in what appears to be a closing of ranks by the Banks hierarchy.

Bailey went on to say that he felt that the economy would be between 7% and10% weaker this quarter than it was at the end of Q1 when the Pandemic really hit.

Three days of intense Brexit negotiation between Westminster and Brussels began yesterday with the lingering rumour of a potential breakthrough still hovering over the talks.

Over the entire Brexit negotiations, there has been talk of a ticking clock or a countdown. Now, with The Prime Minister’s ultimatum a little over two weeks away, it really is coming down to the wire.

The pound traded within the bounds of the rally from the day before, unable to break higher yet supported at lower levels. It reached a high of 1.2903 but fell back to close at 1.2856.

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Democrat shows he can stand up to Trump

The first debate of this year’s Presidential race took place a few hours ago and while it is a little early to declare a victor, the fact that Democrat Joe Biden was still metaphorically standing at the end means he may have just about shaded it.

As predicted by many reporters the debate came close on several occasions to descending into chaos.

Trump’s continual interruptions, insults and hectoring style led Biden to say at one point, Will you shut up man?

Trump questioned Biden’s intelligence, while Biden labelled Trump a clown.

The quip of the night however belonged to Trump who, in questioning Biden’s time in office, remarked that he had done more in 47 months than Biden has in 47 years. Whether true or not, it riled Biden whose response was to scoff and respond that under Trump, the country had become weaker, sicker, poorer, and more divided.

The more significant clashes were over the Pandemic and Race. Biden criticized Trump’s response to Covid-19 where more than 200k lives have been lost, while Trump retorted the number would have been far higher under Biden.

The entire circus moves on to Utah next week with the Vice-Presidential debate taking place on October 7th. Trump and Biden meet again on 15th in Miami.

Outside of the debate, the dollar’s retreat yesterday was mostly caused by profit taking while consumer confidence continued to improve, but had little effect on the greenback

The market appears undecided about the outcome of the debate, with the dollar index falling to test support at 93.80 yesterday, closing at 93.86 and it has barely moved overnight in the Asian time-zone.

Fracturing recovery to test Eurozone unity.

The Eurozone continues to struggle to produce a united front when faced with the challenge of a second wave of Covid-19.

France faces a full lockdown unless they are able to find a more reliable method of tracing those infected. With Marseille already facing a disaster that could be repeated across the whole of France, the economic cost of the outbreak is growing.

While Christine Lagarde pronounces herself satisfied with how the distribution of funding is being carried out, the volume of available cash was agreed prior to the beginning of the second wave so is unlikely to be sufficient.

In Q2, the majority of the contraction in the economy was attributable to the Leisure and Transport sectors which take in accommodation and food services, transport, and storage as well as recreation (cinemas, live music, and theatre).

The growing infection rate will see those areas of the economy affected and slow the recovery while fears of a complete lockdown persist.

Looking individually at the potential of the major economies, Germany and Spain are at either end of the spectrum. As mentioned yesterday, the infection rate in Germany is well controlled. It is no coincidence that Germany also has the most effective track and trace regime. But this then begs the question, if the EU wants to create a unified response should that technology not be shared across the region.

Spain suffered badly from the initial lockdown and although there have been pockets of activity between quarantines, especially instituted by the UK, the Iberian Peninsula will suffer what looks like three winters consecutively in tourist activity.

The single currency continues to disappoint. Yesterday, it recovered part of its losses from last week but faces strong resistance above yesterday’s close of 1.1740.

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.”