7 January 2021: Sterling reflecting Covid concerns

Sterling reflecting Covid concerns

7th January: Highlights

  • Bailey sees no detrimental effect of Brexit on UK economy
  • Democrat Senate victory to lead to a far greater stimulus package
  • Services activity disappoints after strong manufacturing data

Bank likely to loosen policy further

Bank of England Governor Andrew Bailey spoke yesterday of his confidence that the country would thrive post-Brexit. He commented that he doesn’t see Brexit as a major drag on growth and the benefit of the certainty that deal brings outweighs any new regulation of trade.

He went on to say that he does not have any agenda regarding bank dividends having acted to restore the right of banks to pay dividends and last year’s suspension was a one-off.

The pound is struggling to make any further progress against a weakening dollar as the country’s economy faces another recession with the length of the current lockdown remaining unclear.

It is estimated that the current lockdown measures are costing the economy close to £400 million a day. The economy faces the perfect definition of a double dip recession where two quarters of contraction are followed by a period of growth (in this case one quarter) followed by two further quarters of contraction.

The outlook for business failures, particularly in the tourism and hospitality sectors is providing a negative outlook for the country and it may be that the economy is still not back to pre-covid levels by the time this Parliament ends.

With rollout of the vaccine(s) being ramped up the Minister responsible says he is confident that the target of vaccinating 100% of the four most vulnerable groups by mid-February will be achieved.

It had been expected that December’s data for services output would return to growth having reached 49.9 in November. Disappointingly, it fell back marginally to 49.4. That level is unlikely to be seen again for several months as activity begins to dwindle.

The pound remains in a tight range with positivity engendered by the Brexit agreement tempered by the outlook for an economic slowdown. It fell to a low of 1.3539 versus the dollar yesterday but recovered as the dollar reacted to events in Washington, reaching 1.3609. Versus the euro it tested support at 1.1020 trading briefly below that level but recovered to close at 1.1043.

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Trump supporters storm Capitol as Biden’s is confirmed

The two Democrat candidates for election to the Senate from the State of Georgia won the election which took place on Tuesday, tipping control of the Upper House into Democrat hands.

This result makes it far easier for President-elect Biden to significantly increase the level of support the Federal Government gives to those whose jobs and businesses have been affected by Pandemic.

Lame-Duck President Donald Trump made a speech outside the White House yesterday in which he spoke of never conceding, and again making false claims that the election was stolen. This indirectly led to a mob of his supporters ransacking the Capitol building in scenes that threaten democracy itself.

A lockdown of a joint session of Congress was forced by the invaders, which resulted in four deaths. One woman was shot dead by police, while the other three were termed medical emergencies.

Trump called on his supporters to return to their homes but also repeated his previous remarks over the election which were inflammatory to say the least.

Several objections to the result were defeated which drew applause across the entire House but a challenge to the result in Pennsylvania will go ahead but stands little chance of being successful.

There remains a tense atmosphere on the streets of Washington and the fear is that the riots will spread to other cities as Trump carefully orchestrates the unrest from behind the scenes.

Composite data for economic activity in December was released yesterday. It fell slightly from November as the effects of the second wave of the Pandemic took hold but remains well into positive territory.

Minutes of the latest FOMC meeting were released last evening. Members noted that inflation risks are slanted to the downside, while challenges remain due to the surge in Coid-19 infections. Chairman Jerome Powell has provided sufficient advance warning of the Bank’s intentions and there was little further comment regarding further stimulus.

The dollar index remains under pressure with the effect of an increase to support packages for Covid sufferers yet to be fully priced in. It reached a low of 89,20, its lowest since April 2018 but recovered to close at 89.41.

German inflation remains in negative territory

The positivity created by the positive data for manufacturing output in December was quickly subdued by the services data which again failed to reach a level that signifies growth in the sector.

Germany remains the shining light of the battle against the Pandemic but even its service sector is struggling to reach positive territory.

Overall, the December series of activity reports have shown a slight improvement over November but at this rate, it is going to take a significant period of time before the economy returns to its pre-Covid level.

As in the UK, the authorities are pinning their hopes on the distribution of the vaccine and last week’s decision to handle the operation centrally both makes sense and bodes well for future cooperation.

Estimates for economic growth in the Eurozone have again been revised downwards as several member states extend the period of the current lockdowns.

After an estimated fall of 7.4% last year the economy is likely to grow by just 3.6% this year. There will be an additional hit to the economy from Brexit as supply chains are disrupted in the early months but overall, the effect will be minimal.

Business optimism in the region remains fairly positive with large businesses planning for the end of the Pandemic and seeing opportunity.

Despite its recent rally, the euro remains at a fairly good level for companies to explore new export markets and the EU Commission will continue to pressure businesses across the entire union to look at exporting outside the region.

Yesterday the euro continued to be affected by the weakening dollar. It rose to a high of 1.2349, closing at 1.2323.

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.”