7 September  2020: Frost determined not to blink

Frost determined not to blink

7th September : Highlights

  • Virus and Brexit competing to harm growth prospects
  • Inflation data to confirm Fed stance
  • ECB Meeting will confirm Central Bank wait and see policy

No deal Preparations taking on greater urgency

Brexit trade talks continue but there is little, or no progress being made on the two remaining sticking points. First, the UK will not bow to the EU on competition rules. A clean break means just that, and Chief Negotiator Lord Frost has commented that no nation would negotiate a free trade deal if one condition were that a Sovereign State has to abide by another’s laws and rules.

The second point of contention is around fishing rights. Brussels concedes that the UK controls its own coastal waters, but the EU must have access to fish within those waters.

This morning’s press sees no deal as a likely outcome since neither side is willing to compromise. Both sides commented over the weekend that it is the other that is prevaricating and stopping a deal getting done. It is clear that the gulf between the two sides is becoming insurmountable.

When added to the issues of rising cases of Covid-19, the lack of progress is a major concern for the economy despite the bluster of Brexiteers who see no deal as some kind of triumph.

Data for home sales and like-for-like retail sales will be released later today. While these are both secondary rear view mirror numbers they will add to the market’s view of the pace of the recovery.

Last week the pound was under pressure for the first time in several weeks. It was unable to sustain any gains and while a correction could lead to another rally, uncertainty on many fronts makes a test of multi-year high above 1.35 unlikely. It traded between 1.3482 and 1.3176, closing at 1.3279 as volatility increased.

Industrial and manufacturing data for August will be released later in the week and both are expected to remain weak. This sector is now a relatively minor part of the economy although it will contribute to the over Q3 GDP data that will be released next month.

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Inflation indicative of Fed stance

Friday’s eagerly awaited employment report was a mixed bag with optimists concentrating on a falling employment rate while pessimists pointed to a slowing of new jobs being created.

The employment rate fell to 8.4%. This was appreciably better than market forecasts but only 1.3 million new jobs were created, a miss of 100K on analysts’ expectations and well below the number for July.

With significant increases in Covid-19 infections in 22 States last week, Democrat members of the House are calling for a further $3 trillion in support for families and small businesses affected by furlough and job losses.

Employment, especially in the small and medium enterprise sector, is still well below what the Administration predicted, and the politicization of any support package will make it a thorny issue for the election.

Democrats will point to the Administration’s placing of conditions on the renewal of support, while President Trump and his Treasury Secretary label the support a disincentive to look for work.

Comments from Fed officials and FOMC Members continue to support Jerome Powell’s recent comments on changes to the Central Bank’s view of inflation targeting. Boston Fed President Eric Rosengren confirmed in a speech what the market already knew that the Fed will not be even considering a rate hike for some time to come.

Inflation data is released this week and that will also confirm the Fed’s stance.

The dollar index is staging something of a patchy recovery. The only changes from recent weeks have been the return of the market to something approaching full liquidity and a subtle change in market sentiment.

While no one sees the recovery of the economy as a given, when comparing the improvement in sentiment and activity indices with other major economies, the U.S. appears on track without lighting any fires.

Last week the dollar index recovered to a high of 93.24 and the close above 92.80 is a modestly bullish signal, especially since the close was just one pip above that level.

Centralization fetish makes Brexit deal less possible

Brussels’ infatuation with centralization is becoming unhealthy and its determination that state aid be kept at a minimum to ensure a level playing field is now a major threat to the Brexit deal with the UK.

It is easy to say that one side or the other is being obstructive depending on one’s point of view but it seems fairly clear that in the case of Brussels demand that the UK continues to be bound by their business and support regulations is a compete non-starter.,

Without that major stumbling block, it is possible that a deal on fishing rights could be achieved although the UK’s fishing fleet deserves to be protected given the hoops it has had to jump through to be compliant over the decades of the UK’s EU membership.

The ECB meets this week and it is words rather than deeds that will be the market’s focus. It is a given that both monetary policy and asset purchases will be left unchanged. As QE becomes a legitimate policy tool, again pioneered by the Fed, the two will be announced hand in hand.

As is usual with the ECB they will announce, or at least allude to, what they are planning in the future. This almost laissez-faire attitude does not breed market confidence and there is an underlying view that should urgent or intra meeting action be necessary, the Central Bank would struggle to make the necessary decisions

With the data calendar fairly light this week and the ECB unlikely to take any fresh action, it will be left to ECB President Christine Lagarde to provide support for the economy and the currency.

However, she is unlikely to do any more than confirm what has been said already and that the ECB stands ready to provide further support if needed.

Last week, the euro tested support at 1.1780 as the dollar corrected. It traded between 1.2011 and closed at 1.1903. It looks vulnerable now having taken a peek above 1.20.

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.”