5 February 2021: Bailey: Risks have become balanced

Bailey: Risks have become balanced

5th February: Highlights

  • MPC sees fast improving economy as vaccination programme accelerates
  • Jobless claims moving in right direction, now for new jobs data
  • Vaccine row seems to have put EU on the backfoot

BoE doesn’t want to encourage negative rate discussion

Yesterday’s Bank of England MPC meeting was more positive about the recovery than it has been for some time. This allowed talk of negative interest rates to be slipped onto the back burner with little comment.

It has emerged that the Bank canvassed 160 lenders in the UK to understand the practicality of how negative rates would work in practice.

The operational difficulties for banks led the MPC to agree that it would provide the market with six months’ notice of such a move.

This appears rather curious in that it is fairly obvious that the economy is in an extraordinarily precarious position and should the MPC believe that such a radical move is warranted, it is then prepared to wait two quarters to implement it.

The rollout of the Covid 19 vaccination programme continues at a startling pace.

The country had become accustomed to this Government having to make excuses for delays, whether they be Brexit related or in the reaction to the fast-moving effect of Coronavirus, over its entire term in office but with now well over ten million jabs having been provided, a corner may have been turned.

Prime Minister Boris Johnson is now facing even more fervent questioning over the lifting of the lockdown but appears to be determined to put saving lives ahead of the support for business that easing restrictions would bring.

In his remarks following the decision to leave both interest rates and QE unchanged, Andrew Bailey was optimistic in his views on the pace of the recovery. He believes that the second half of the year will bring a period of expansion that leads to 5% growth this year overall.

One continuing cloud for the MPC is the level of unemployment. Bailey believes that official data may not tell the whole story, and the real rate may be already close to analyst’s worst-case prediction of 8%.

As the lockdown begins to ease, there will be little time for the Government to ease the country out of lockdown if jobless figures are not to spiral out of control. The most affected sectors of the economy must be identified and supported in a more targeted manner.

Rishi Sunak’s budget, that will be delivered to Parliament in less than a month, has to be the most expansive in a generation if any nascent recovery is to be cemented in place.

The pound continues to threaten to break lower but is running into pockets of buying interest versus the dollar. Yesterday, it fell to a low of 1.3566 as concerns over negative interest rates dominated, then a more positive than expected MPC press conference lifted it to a close at 1.3676.

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Sluggish improvement in GDP for few more months

Bank analysts in the U.S. believe that the worst of both the Coronavirus pandemic and economic uncertainty have passed. On average, the top twenty banks in the country see GDP growth for 2021 at 5%.

Issues over the distribution of the vaccine appear to have mostly been resolved while figures for take-up are improving.

There is little doubt that FOMC members have agreed to commence a charm offensive in which they extol the virtues of both the fiscal and monetary policy steps that have been taken so far.

The comments have been laced with a degree of realism in that it is widely agreed that the then recovery won’t really gather pace until the third quarter and will remain sluggish and patchy until then.

There is a growing sense of optimism over the January employment report that will be released later today. It is hard to pin any reason for this since the weekly jobless claims data has not exactly been lighting any fires.

The most recent report, which was released yesterday showed that 779k new claims were made versus a downwardly revised 812k the previous week. Continuing claims remain fairly steady at close to 4.6 million while the four-week average of new claims is still around 850k.

The unemployment rate is likely to remain stubbornly above 6% and the Biden Administration is going to need to introduce a wide-ranging job creation package if the pace of any recovery is to be sustainable.

The dollar index is still very well supported around the 90 level.

Yesterday, it rallied to its highest level since the end of November, climbing to a high of 91.58 and closing at 91.55. As mentioned earlier this week, a medium-term base is now in pace at 89.20 and a return to economic rather than global risk drivers appears to be commencing.

Italy in a safe pair of hands

The fiasco over the purchase and delivery of Covid-19 vaccinations is beginning to linger like a bad smell around the halls of the EU in Brussels. This could lead to a crisis of confidence where even the fiercely pro-EU former Belgian PM and MEP Guy Verhofstadt has become highly critical.

A few of the more right-wing European newspapers are beginning to question the credentials of Ursula von der Leyen for the role of EU Commission. Far from looking at her record once her term in office came to an end, some are querying how she came to be appointed in the first place.

Having been immediately faced with a triple whammy of a rapidly slowing economy, Brexit, and the Pandemic, von der Leyen has clearly come close to being simply overwhelmed.

The criticism of her handling of the vaccine dispute has grown to such an extent that it is close to becoming a crisis of confidence the like of which has not been seen in a Union that is extremely self-protective.

Former ECB President Mario Draghi is still agonizing over the makeup of his national unity Cabinet.

A softening of the attitude of the Five Star Party has been a positive development and former Prime Minister Giuseppe Conte is broadly supportive.

While having shown few previous political aspirations, Draghi is expected to work closely with Conte, who is himself not a member of any Party although is leanings are towards the populist/nationalist views of Five Star.

It is difficult to see how Draghi will be able to heal any wounds with Brussels that have widened since the country elected a populist coalition. He is unlikely to support the rise in public spending that is close to out of control due to the Pandemic and the plight of banks which are drowning under the twin threats of falling profitability and rising bad loans.

Super Mario will quickly be reminded, if that were needed, that his loyalty and allegiance is to Rime not Brussels and that will certainly see him at odds with ECB President Cristine Lagarde.

Yesterday, the single currency broke conclusively through the 1.20 barrier versus the dollar. It reached a low of 1.1957, closing at 1.1965.

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.”