4 June 2021: Anger as Portugal turns amber

Anger as Portugal turns amber

4th June: Highlights

  • Upbeat theme set to continue
  • Jobless claims at Pandemic low
  • Lower Euro despite positive data shows dollar’s pull

Government cuts off foreign holidays to help reopening

The UK recovery continues to gather pace but as mentioned yesterday, it is impossible for the Government to please everyone.

The howls of protest heard yesterday as Portugal was removed from green on the traffic light system to amber means that the only viable mass holiday destination now requires five days of isolation and a single negative Covid test for returning travellers.

Accusations, especially from the tourism industry, centre around a promise the Transport secretary apparently made that he would give three weeks’ notice of any negative change to a country’s status. If he did make such a promise, it would have been incredibly naive since the situation with new variants is so fluid.

Yesterday’s move clearly illustrates the Government’s priorities. It remains committed to the complete removal of restrictions in England and sees foreign holidays as insufficiently important to risk a benefit to the entire country.

The work that is taking place to complete free trade agreements post-Brexit continues to see bumps in the road.

The U.S. announced yesterday that six countries, including the UK, would face deferred tariffs on trade in goods and services due to their taxes on digital services. The U.S. is pushing for a global tax regime and the six countries are being pushed to agree through the OECD and G20.

This is seen as positive since it is an agreement that should prevent future disputes and the UK has six months to continue to negotiate before the tariffs begin.

The recovery in employment is really beginning to take hold as the rate at which companies took on permanent staff hit a 23 year high.

The issues of skills shortages don’t appear to be affecting the UK. The index that measures new hires jumped 50% from April’s number.

The pound fell yesterday as traders decided to buy the dollar ahead of today’s data.

It fell to a low of 1.4086, closing at 1.4106. The return of volatility may be short lived depending on the outcome of events across the Atlantic and comments from the Federal Reserve.

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Positive data to drive Fed to accept need for tighter policy?

Every month the financial markets put aside rational decision making and decide to gamble on the outcome of a single piece of data that is subject to several estimates and a considerable degree of volatility.

This has been especially true over the past few months as the reaction to the V-shaped recovery has seen the Non-Farm Payrolls gyrate.

This has been more when considered against traders estimates than any practical gauge.It is entirely predictable given the scale of the reopening and the nature of how it has been handled from state to state.

Today’s employment report will be no different to usual, other than in one vital detail which is becoming undeniable.

The Federal Reserve is risking its own credibility and the reputation of its Chairman Jerome Powell by adopting what the market perceives to be a laissez-faire attitude to inflation.

Inflation is almost like the villain from a children’s bedtime story since virtually no traders working today have seen a market afflicted by volatility in interest rates driven by tightening monetary policy.

Jerome Powell will be making a speech later today, a couple of hours before the data is released. He will have to tread carefully as he is certain to be aware of the data.

Putting aside the actual data, the skew of the market deserves consideration.

This is what is the likely reaction to a positive or negative outcome. The market’s reaction to a number that beats expectations will probably be more violent than a number at or below.

That is because a disappointment will drive more indecisive rhetoric from the Fed, while a strong number means the Fed will have to react even if it is only verbally.

Yesterday, the dollar index reacted positively to the data for weekly jobless claims, which fell to a Pandemic low, and the continued improvement in private sector hiring.

It rose to a high of 90.55 and closed at 90.49. While no one is predicting the end of the current downtrend, every journey starts with a single step.

ECB also facing a test of nerve

It is becoming something of a trend, an ultra-long-term trend, but the Eurozone is becoming split in two economically.

So far there are only two data-points on the graph, the effect of the financial crisis and the Pandemic but it means that there is a definite fracture between the haves and have nots.

There is no doubt that this is a structural issue that will be almost impossible to resolve. Any solution requires a change in the entire national psyche of the weaker and weakening economies since the stronger ones will call the tune for as long as the Eurozone exists.

The Eurozone follows the Golden Rule. The one with the gold makes the rules.

In the early days, the talk was always about the one size fits all monetary policy decided over by a Central Bank designed in the image of the most hawkish in the Union: the Bundesbank.

Now that expression has some genuine credibility since the weaker nations borrowing has had to be allowed to escalate.

The gathering storm has two new factors which may tip the balance.

First, France has switched sides to be a weaker nation given the explosion in its debt to GDP ratio and Italy is now run by ex-ECB president Mario Draghi.

France faces a Presidential Election next year with a Eurosceptic right-wing firebrand well placed to win. In Italy, the pragmatic Draghi may be forced to put aside his strong pro-EU credentials and do what is right for his country.

With the dollar unlikely to remain in the doldrums forever, it may be the political outcome of the pandemic that sees the euro begin to weaken towards parity with the greenback.

Yes, a long journey does indeed start with a single step. The euro fell to a low of 1.2118 yesterday, closing at 1.2127.

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.”