Is the MPC meeting irrelevant?
5th August: Highlights
- New lockdown concerns hit Sterling
- It’s impossible to ignore employment
- ECB commitment unwavering. But commitment to what
The near future is about jobs and support
New Governor Andrew Bailey will affirm his desire to provide liquidity to the economy, stopping short of taking the official interest rate below zero.
However, is that going to have any effect on how the economy performs for the rest of this year?
Short answer? No!
Monetary policy is in danger of becoming irrelevant. That is a theory that could shake the walls of Threadneedle Street to their foundations. Some would say that the official rate of interest has always been irrelevant, but for now it certainly is.
For the man in the street, it is far more important to be able to go out, possibly take his family out and eat at a price they can afford. The Eat Out to Help Out scheme looks like it is a success. Of course, we will need to await official data but anecdotally it looks that way.
The assistance that Chancellor Rishi Sunak can provide is considered far more important than another x-billion of additional liquidity which makes no difference to daily life.
Dealing with a second spike, its effect and the effect of the aftermath matters to the entire country, every vertical and every horizontal.
This is the reality of today’s economy, Covid-19 has sharpened a lot of minds on just how important employment really is. Simple economics is not beyond anyone’s comprehension.
There is one pot, tax money goes into it and social funding whether on infrastructure or supporting those out of work comes out. Government borrowing is the balancing factor. Politics then plays a part. Socialists believe in borrowing more to fund social services while the right believe in cutting services to balance the books.
Coronavirus has laid all this bare.
This whole scenario drives the pound but the matrix of factors that drive it remain complicated. The value of the pound is of course comparative, so the drivers of every other currency become a factor.
Currently the pound has been buoyed by a comment made a few weeks ago by the Bank’s Chief Economist but it is now wearing a bit thin and the pound is running out of steam. Yesterday, it fell to a low of 1.2981 versus the dollar but recovered to close at 1.3052.
Fed. important to confidence but what about Congress?
The current situation in the U.S. has sidelined Monetary policy but everyone listens when Jerome Powell speaks.
Above all else, the U.S. economy is driven by confidence. That is what allows four firms to command close to 25% of the capitalization of the stock market. Investors believe in them, trust their judgement, and accept they are the future.
The most recent FOMC meeting was a little predictable. Previous Fed Chairman have prided themselves on being somewhat maverick. Powell is the exact opposite; he believes in working with every area of the economy and his popularity (outside the White House) has saved his job on more than one occasion.
So, while the most recent Fed meeting was fairly predictable in its commitment to support, this week’s employment data is anything but.
The NFP could be anywhere between +5 million new jobs and zero, Thursday’s weekly jobless data could see 1.5 million new claims or a million. Continuing claims could be even more erratic.
The dollar resides in this confidence driven world although it is often not called confidence but risk appetite. It exists on a couple of planes. First it is the U.S. currency driven by current and future expectations for the economy which drives investors. Its second role, which is also vital although maybe diminishing, is its role as the global means of exchange.
Again, if global risk appetite falls, the dollar gains as Central banks and large corporates want to be liquid in dollars to insure against any illiquidity elsewhere.
The dollar index maps the dollar’s values against a basket of currencies. While the baskets components are a little outmoded, it serves its purpose for comparison.
Yesterday, it traded in almost the same range as on Monday as the market awaits the employment reports. No, not the Fed, but a data release which provides a snapshot of the economy.
Supporting the economy is not supporting the currency
Protecting the currency is a monetary policy function, while protecting the economy not a single institution job.
The ECB operates in the monetary policy sphere, with a toolbox that has existed, subject to a few adjustments, for many years. Where the ECB differs from the rest of the big four is that there is no relationship with a single finance minister who is able to discuss fiscal policy and commit to the same goals as the Central Bank.
That puts the ECB at a tremendous disadvantage. It also makes it a hugely cumbersome operation.
While it can be argued that the representative of every Eurozone member, who is also his country’s Central Bank Head, discusses fiscal policy with this one Finance Minister. However, those ideals often do not translate into a Eurozone-wide policy.
The single currency benefits from a huge amount of goodwill.
If it succeeds and there are periods when that is under question, it will create a balance for the long term. It is not favourable for the global economy to be driven overall by two nations with totally opposing dogmas as is seen now with the U.S. and China. With pragmatic leadership the EU could provide balance. It is naturally socialist leaning but has a commercially driven core.
The euro makes up a huge percentage of the dollar basket so is unduly influenced. However, that often provides a degree of support.
Yesterday was a prime example, the single currency which looked like correcting its recent rise further in fact rose on the day as the dollar stumbled. It reached a high of 1.1806, cloning at 1.1785.
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.”