5 June 2020: UK unlikely to ask for extension

UK unlikely to ask for extension

5th June: Highlights

  • Brexit deadline approaching
  • Congress unable to agree benefits extension
  • ECB to inject another Eur 600 billion

Johnson tells businesses to prepare for exit

Despite the pressure that businesses in the UK have faced over the Covid-19 pandemic, Prime Minister Boris Johnson told them yesterday to prepare for departure from the Single Market and Customs Union on December 31st.

With thousands of businesses of all sizes on the brink of collapse despite the Government’s packages of support, analysts had believed that the negotiations may be extended but with a 30th June deadline for the UK to request one, any hopes that that may happen are fading.

Several economic forecasters are discounting that the UK will see negative interest rates by the end of this year at the latest. Supporting the Fiscal support that has been given to business by the Treasury is the Bank of England’s number one priority and it will need to happen following the expiry of the various furlough schemes which happens in October.

There are fears that the move to negative rates will last for years as once the move has happened, it can become almost impossible to reverse as the economy grows while experiencing extraordinary support.

The way in which stimulus that has already been delivered by the Central Bank has supported financial markets but the question of how much help it is providing to the man in the street is more difficult to answer. As investors become more used to seeing little or no interest paid by banks on their deposits, they have pushed equity markets to fresh highs as a search return for pension funds continues despite the worst recession in 300 years on the horizon..

The hope is that low rates will deter savers and encourage spending to boost the economy, but with savers funds being denuded year after year, they could revert to keeping cash under the mattress, which risks a whole no world of problems.

The market’s concerns over negative rates and Brexit are beginning to feed through into the value of the pound. While it continues to rally versus a weakening dollar, closing at 1.2597 yesterday, having made a high of 1.2633, it is versus the single currency that it is seeing the most damage inflicted. It fell to 1.1102 yesterday closing just eight pips from the low.

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Continued financial support in jeopardy

The final few months of President Trump’s first term as President will be marked by dividing him into three. He will feel like Woodrow Wilson in 1918 facing the Spanish flu epidemic, F.D. Roosevelt in 1933, during the depression and Lyndon Johnson in 1968 following the riots in the wake of the assassination of Dr. Martin Luther King.

While those three Presidents had surrounded themselves with strong advisors and knowledgeable experts, Trump’s my way or the highway methods do not bode well.

Making judgements more in hope than judgement have served him badly thus far. Looking at the three issues he faces, the Covid-19 pandemic is still raging as other nations seek to cautiously reopen their economies.

The U.S. appears to be gearing up for an all or nothing approach where the entire economy is reopened in one go but Trump faces a backlash from State Governors whose role it is to decide if and when their own economies open up.

While it cannot be discounted, as it hasn’t been tried anywhere ( and there is a good reason for that) that would make U.S. citizens guinea pigs for herd immunity which may create further issues to fuel civil unrest which continues to be seen across the country.

The level of unrest caused by the murder of George Floyd continues to grow and Trump’s unswerving belief that the marches and vigils being held are unlawful does nothing to quell the issue.

These two issues combine to make the third issue more serious (if that were possible). While both the Federal Reserve and Treasury are working tirelessly to soften the blow from the economic slowdown, the length and depth of the recession remain impossible to predict. Congress remains unsure of its future path. Having approved the largest unemployment relief package in U.S. history, the next move, following the expiry of that support on 31st July could be critical.

Weekly jobless claims, data for which was released yesterday, showed that 1.87 million new claims were made. While encouraging, this shows that the economy is still slowing at an alarming rate.

Today’s employment report will illustrate how much an extension to unemployment support is needed together with a concerted and unified approach to solving the triple headed monster facing the country.

Yesterday, the dollar’s fall continued. The index fell to a low of 96.57, closing at 97.76, completing eight straight days of falls.

But can it do anything more?

At yesterday’s meeting of the ECB’s Governing Council, President Christine Lagarde failed to pull a new rabbit from the hat, but dusted off an old and trusted one, which pleased markets and analysts alike.

The ECB announced that it was pumping a further Eur 600 billion into the economy as the bloc faces its worst recession in history and unprecedented falls in employment.

While unemployment and the benefits given to the population are the domain of individual states since there is no Fiscal Union in place (where are you hiding M. Juncker?), the ECB is desperate to ensure that liquidity remains sufficient. The bond buying programme, reintroduced in March, has now been topped up, to total the eye-watering sum of Eur 1.35 trillion.

In her press conference following the announcement, Ms. Lagarde commented that the Union was facing an unprecedented contraction which will bring the global economy to a virtual standstill.

With unemployment continuing to rise and businesses beginning to be released from lockdown, the next two or three months will shape the Eurozone economy for the next two or three years.

While other G7 economies demonstrate a far greater degree of cooperation between monetary and fiscal policy, the lack of that unity is sure to hamper the speed and degree of recovery across the EU and Eurozone. Certain economies needing more support than others and divisions will open up regarding how that support is funded.

The market took the news of the ECB’s announcement well and the single currency rose across the board. It reached a high of 1.1362 versus the dollar, closing at 1.1337.

Resistance now stands at 1.1399, its closing high from the rally in early March. It is difficult to suggest that that is a level that can be broken at the first attempt, but with a weakening dollar and a strengthening single currency, today’s data could see it happen.

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.”