8 June 2021: London market key to growth

London market key to growth

8th June: Highlights

  • UK will need to use Brexit advantage post-Covid
  • Economic optimism at three-year high
  • Recovery to drive inflation higher

Financial services need to beat off EU challenge

The Prime Minister wants to create a closer bond between the Government and the City of London’s financial market in order to determine that current and future legislation is friendly to the market and ensures that it maintains its dominant position globally.

There is sure to be further competition from Paris and Frankfurt to try to take business away from London as Brexit matures, but Johnson is determined to ensure that the City receives as much help as it needs from his government.

Competition from Brussels is going to be an ongoing theme in the post-Pandemic period. It is clear that the EU is determined that London won’t gain any advantage from its departure from the EU and any loophole will be quickly closed.

The highest profile dispute: over fishing rights, is set to continue for some considerable time and could escalate as traditionally militant French fishermen are determined that they should be allowed to fish in British coastal waters.

There has already been a skirmish as the French threatened to blockade Jersey’s main port but that subsided.

The UK is going to have to develop policies that push the country forward into a new era.

Covid has created a clear definition of the UK’s departure from the EU and provided a period of grace that wasn’t envisaged.

Having faced up to Brexit and to the Pandemic, neither of which were handled without controversy, Johnson must now bring forward policies, not rhetoric to make use of both his House of Commons majority and the technological advances created by British pre-eminence in several key new industries.

Scottish Independence will be the next cab off the block. The SNP is still strong in Scotland but its supporters, while happy that decisions about Scotland are made in Edinburgh, may still not be able to 100% support independence.

While Johnson can simply refuse to sanction another referendum, he may be forced to allow further devolution of power.

The FX market seems to be currently driven by a degree of anticipation of a certain event, the latest being the U.S. payrolls data, but if its expectations aren’t met, there is confusion about what happens next.

Traders remain convinced that the next trend is for the dollar to recover but until the Fed acknowledges the need for tighter monetary policy, they are content to sit on their hands until the summer lull passes.

Yesterday, the pound fell to a low of 1.4111 but rallied to close close to its high of the day at 1.4183.

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Treasury Secretary sees benefit of higher rates

Janet Yellen has come back swinging for the fences as she adopts a far higher profile than she did as Chairman of the Federal Reserve.

One of her first moves as Treasury Secretary was to support large scale stimulus measures to support the economy at the height of the Coronavirus Pandemic. Now she has backed the Fed in raising interest rates and tightening monetary policy when the time is right.

In a speech on Sunday, Yellen commented that she believes that the President should continue to seek a course of higher infrastructure spending and various other stimulus measures even if it means higher prices and interest rates.

It is clear that Yellen believes that such outcomes will be transitory, with short term bottlenecks in supply and labour shortages a temporary inconvenience.

She feels that there is nothing structural about the current issues facing the domestic economy. The reaction to the amount of stimulus has created a Tsunami of opportunity and choice that has was missing for the man in the street during the entire Trump era.

For that reason, the economy will adjust to the investment that is taking place and eventually higher interest rates will be something of a natural progression.

The Federal Reserve meeting that takes place next week will not see any significant increase in volatility in the market as traders resign themselves to another period of waiting for the FOMC to act.

Jerome Powell appears to be content to allow all of the stimulus to do its job before he has to react to rising inflation.

He is perfectly happy to acknowledge the need for the gradual withdrawal of support through tapering bond purchases but the decision of when not if, remains the single driving factor behind the entire recovery.

Yesterday, the dollar continued to drift, close to recent lows. The market believes there may be one last push lower before the recovery begins that could reach support at 89.50. A movie substantially below that level would signify a complete change in direction and expectation.

Yesterday, the index closed at 89.98 falling from a high of 90.30.

Lagarde already shows her hand

Christine Lagarde has provided the market with sufficient advance guidance already indicating that there will be no change from the ECB to either its bond operations or monetary policy.

With the G7 meetings taking place in the UK at the weekend, Lagarde is keen to step onto the world stage where she feels most comfortable.

Lagarde sees herself as a Statesman, making the big policy announcements as she has in previous roles.

Trying to control the squabbles of the members of the Central Bank’s Governing Council members is, while not beneath her, a task for a more bureaucratically driven banker like her predecessor.

Lagarde has found herself at odds with her American counterpart Jerome Powell over the role of Central Banks in climate change and the adoption of policies to encourage a greener future.

This is a subject Lagarde feels is in keeping with her ambassadorial credentials. This could lead the ECB to make the mistake it has made before of moving on to the next issue without solving the current one.

The recovery is taking shape, so Lagarde want to have the details to the bureaucrats and display her green credentials to the G7.

Whether representing France or the European Union, Lagarde carries significant weight, but her legacy depends on ensuring that the EU is based on solid foundations before she pursues the Presidency of France which would seem to be her ultimate goal and something she seems perfectly suited to.

Today’s release of German data could jolt Lagarde back into the present should it be sufficiently strong to warrant comment from the Bundesbank. However, she will feel that she has made her feelings known and is keen to arrive in Cornwall to take up her green campaigning position.

The euro continues to mirror the dollar. It fell to a low of 1.2145 before climbing back to 1.2189.

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.”