6 August 2020: Recovery no longer V-shaped

Recovery no longer V-shaped

6th August: Highlights

  • Bank of England unlikely to change its stance
  • Dollar overshadowed as gold reaches all time high
  • PMI’s return to growth

Haldane’s words are a symbol of a fast-moving situation

When Bank of England Chief Economist Andy Haldane made his prediction of a V-Shaped recovery it seemed from the data that has been released since that he was definitely on to something. The economy seemed to be recovering nicely and the Chancellor’s innovative schemes were being deemed a success.

What a difference a week makes. Despite the pound reacting positively to a weakening dollar and data which shows that there is a recovery, of sorts, happening, the spectre of a second spike is taking shape.

The Government’s ability to support the economy should a second lockdown either partial or total happen is being seriously questioned. In fact, the continued support that is being offered, albeit at a lower level than seen earlier is placing an even greater burden on the country’s finances. It is fairly obvious and also not outside the realms of possibility that Rishi Sunak felt that not only would he be able to reduce the level of support offered but he would also be offering that support to fewer workers.

As it turns out, those remaining on furlough remain worryingly high and with some leisure activities reopening being postponed and concerns over a trade-off between schools reopening and pubs and restaurants closing concerns will be growing. The time it is going to take to get the country’s GDP back to the level seen in Q4 ‘19 is growing almost daily and as it lengthens, resources become thinner.

Pound reversed its recent falls yesterday as the dollar fell on the back of more concerns over the economy. It reached a high of 1.3161, closing at 1.3130. This broke a three-day losing streak.

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Dollars safe haven status tarnished

The dollar index renewed its fall yesterday as gold hit an all-time high. Gold is the go-to asset in times of global uncertainty when the value of paper money remains uncertain.

While the yellow metal has been in a subdued state for more than ten years now, as equity markets rallied to successive records.

Now with Coronavirus a global phenomenon which, it is becoming generally agreed, cannot be controlled until a widely accepted and used vaccine is produced has dealt a serious dose of reality to the global economy.

The U.S. is now considered to be a model of how not to deal with a global pandemic. It has been late to every significant event and has barely controlled the spread of Covid-19 with many states still reporting rising cases.

President Trump has used the outbreak as well as civil rights unrest as political tools, while Congress is still unable to find an agreement over the replacement for the Coronavirus Relief Bill which expired last Friday.

Data releases which are slowly improving are being largely ignored as employment remains the only issue that concerns the population. Later today, we will see the weekly and continuing jobless figures. This is unlikely to be pretty as new claims start to rise again.

The dollar index fell yesterday to a low of 92.56, closing at 92.80. Around 92.56/60 appears to be attracting some buying interest but with monetary policy and economic data barely having any effect, it is hard to see technical levels being any more successful in slowing the dollar’s slide.

Lifting of lockdown may be brief but shows potential

The second spike of Coronavirus which is rolling slowly but inexorably across Europe may eventually see borders closed, vacations destroyed, and life go back to what it was earlier in the year.

However, consumers are making hay while the sun shines, proving the adage that, if the shops are open, shoppers will shop.

Pent up demand is the main reason for the bounce in retail sales with fashion conscious Romans and Parisiennes desperate, having lost an entire fashion season, while the diet of the rest of the region has become a little too plain.

The latest data for retail sales shows that they are almost back to pre-lockdown levels. The issue remains that in common with several other industrialized nations the relief may be short-lived with predictions of infection rates and fatalities growing almost daily.

With Northern Spain replacing Lombardy as ground-zero for the second spike, scientists are studying the spread of the initial pandemic to try to learn what could be effective.

With gold having spiked and the dollar resuming its downtrend, the single currency had another day in the sun yesterday, it rose to a high of 1.1905, closing at 1.1865.

The constituents of the dollar index that have been making highs recently seem unable to move to the next level although it would be a brave man who would predict any significant return for the greenback.

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.”