Market awaits Sunak’s wish list
8th July: Highlights
- Brexit common ground boosts Sterling, while Sunak ponders support
- Dollar in doldrums as virus cases rise
- Eurozone to find a new, lower level of activity going forward.
Brexit talks continue. Good news at last?
While the Prime Minister is painting with broad brush strokes, Sunak will be expected to put some flesh on the bones of his plans. Johnson spoke recently of kickstarting the economy by investing in infrastructure, but Sunak’s approach will more likely provide real assistance to those either out of work or facing redundancy.
There have been rumours of direct economic support in the shape of voucher schemes designed to help specific sectors like the construction trade as part of a green initiative but a £2 billion fund to help 18-24 year olds struggling to find work will be the more likely way forward initially.
The Treasury has stressed that today’s announcement will not be a fiscal event, in that it won’t be like the Budget or Autumn Statement. There will be no projections about growth or activity meaning it will simply contain a set of measures to help the country deal with phase two of the effect of the pandemic, the longer-term effects.
Other measures being mooted as possibly significant could be a stamp duty holiday which will help the housing market. From this and the idea of home improvement grants it appears that Sunak and his Treasury team have identified construction as an area that will be particularly badly hit.
There have been some positive whispers from both sides about a degree of progress having been made in the negotiations over the UK’s relationship with Brussels once Brexit takes place at the end of the year. While there is never any official statement over how the talks are developing or where the difficulties lie, rumour will continue to drive the market.
Yesterday, the pound reached a high of 1.2592 and closed at 1.2542. Its close above the 1.25 level is a bullish sign technically but a lot will depend on the performance of the Chancellor later today.
Congress considering where support goes from here
It is obvious that the Administration believed that the worst of the effects of Covid-19 would have passed by now and it would be creating defences to deal with any second wave, but since the pandemic continues to rage through several states dealing with the first wave is still the main priority.
No one is in any doubt apart possibly from President Trump and his closest advisors, that the severity of the pandemic has been underestimated and opportunities to curb its spread have been missed at several key points.
The House Majority Leader has continually said that July would be when the second package would be discussed and agreed and in a speech made yesterday, Mitch McConnell confirmed that it’s July so I would predict that the decision will be made in a week or two.
It is rumoured that the issue of a second one off payment is favoured as it treats everyone the same and provides cash up front to those who need it most. It should also provide impetus to the economy that the drip feed of weekly payments would not.
When the entire country is looked at State by State, it is difficult to roll the data up into one outlook for the entire country. The wave raging across Southern States has the hallmarks of the first wave of infections while the Eastern States, worst hit initially, fear a second wave in the Autumn. However, it looks like the second wave is about to start in New Jersey.
Meanwhile on the other side of the country, California already appears to be well into a second wave. With so little definitive data to work with it is impossible to predict how leading indicators will react as rear-view mirror measures like employment and growth suffer from the effects of the worst months of infection and lockdown.
Traders are finding it impossible to discern a trend for the dollar given current market conditions that could best be described as messy. Yesterday it traded between 97.15 and 96.60 as ranges are tending to narrow. It closed at 96.92.
Steeper recession and shallower recovery predicted
Elected officials and those nominated to drive the EU forward like Commission President Ursula von der Leyen and her Council counterpart Charles Michel are illusive figures seemingly unable to break free of the shackles of bureaucracy to provide the dynamic leadership that is so evidently needed.
The upcoming vacation season is both a blessing and a curse to several individual members of the Union. The southern states are hopeful that their season won’t be ruined by the slow transformation out of lockdown but remain mindful of a second spike of infections that could destroy a substantial part of their economy, while the north continues to try to decide how to persuade Austria, Holland, Belgium, and Finland to participate in the financial clean-up.
A lot of the burden of dealing with the financial fallout using well established tools has fallen to ECB President Christine Lagarde. Having been MD of the IMF before moving to the ECB, she will be used to dealing with intransigence and self-interest which gives her an advantage over a technocrat like her predecessor.
Speculation is also the only tool currently available to bankers, traders, and analysts as they paint a darker future for the region on an almost daily basis. The most percent forecast sees the Eurozone economy shrinking by close to 9% this year but only seeing around a 6% rise next year. Previously the EU Commission had estimated the downturn at 7.5% and the rebound at 6.5%.
These numbers mean very little without a practical idea of what it means. The most easily identified sign will be unemployment and this could lead to a huge migration between countries as workers leave their home countries in search of jobs.
Yesterday, the euro was mired in the same corridor as the dollar and pound. It traded up to 1.1332, before falling back to close at 1.1273. As long as it remains above the 1.1350 level, it will retain a marginally bullish overtone but that is a very fragile premise.
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.”