9 July 2020: Sterling unmoved by Sunak’s plan

Sterling unmoved by Sunak’s plan

9th July: Highlights

  • Cost of Covid soars
  • Slow take-up of support set to change
  • Italy likely to be worst hit EU State

Pound’s reaction muted

The pound rose versus the dollar yesterday, but it had little to do with the series of handouts announced by Chancellor Rishi Sunak.

Following a week of speculation, Sunak had decided that the hospitality sector that was on the brink of decimation was the neediest area of the economy as he announced several novel schemes.

Prime Minister Boris Johnson, sitting beside his Chancellor as he announced the measures to Parliament, was clearly satisfied that the country is moving in the right direction.

Youth employment received a major boost with a scheme announced to provide placement schemes that lead to full time jobs for 18-24-year olds.

Firms who take back furloughed employees will receive a cash bonus of £1,000 per employee if they keep them on until the end of January.

Sunak’s plans contain some innovative ideas, not least of all the half price meal deal, but they also contain an element of kicking the can down the road which is understandable as he doesn’t have an unlimited money tree. A reduction in VAT has been warmly received but as is usual where a degree of relief is offered, more would have been more welcome.

The overall cost of the Covid-19 Pandemic will be in excess of £300 billion and it will take some further, less palatable decisions for Sunak to be able to balance the books. He may be left with the stark choice of cuts to services or tax increases in the winter or early next year although Johnson has already ring-fenced the health and care sector as being virtually untouchable.

The pound reached a high of 1.2623 versus a weaker dollar yesterday, closing at 1.2610.

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Boston Fed. President sees take-up of support increasing

The U.S. recovery from Covid-19 may take longer than expected to begin as Small and Medium Enterprises have been slow in taking up facilities that are being provided by the Federal Reserve and are available through banks.

In several States, the banks have been overly cautious in their lending practices that has added to a reticence to apply, but it has also been due to a lack of applicants.

Fred Rosengren, the President and CEO of the Boston Fed. has also put this slow take-up down to a feeling among SMEs across the country that they would be able to survive without adding another liability to their balance sheets.

That is proving not to be the case, and the number of firms realizing that they need help is starting to grow exponentially. This has led Rosengren to comment that as more firms apply for support, the realization will grow that this will not go away overnight

There have been several adjustments to the scheme to make it both more widely available and more palatable to both lenders and borrowers. The term of loans has been extended to five years, the minimum amount has been cut and funding is now also available to non-profits.

While businesses are receiving support, the public are becoming increasingly concerned about what will happen next for their support programmes. This is feeding through into concerns about the recovery which may have a significant effect come November. With the economy being promoted as one of President Trump’s success stories and a dent in sentiment is bound to hurt his campaign.

Yesterday the dollar index wilted a little, falling to a low of 96.39, but recovering a little to close at 96.48. There is no discernible trend for the currency market with day-to-day announcements, predictions, and support plans providing short term direction.

S&P sees the Eurozone in a difficult spot.

The ratings agency S&P published its global economic review and forecasts recently and its concerns for the Eurozone centre around the tricky situation it faces in the timing of the reduction of relief.

Since the economy was slowing in any event, business was beginning to suffer before the pandemic hit and this will lead to both a reliance upon support as and when it is given and a shallower recovery that previously believed.

Savings rates have risen significantly during the lockdown for two reasons; first, with little to spend money on, it has been easier to save and second the worries about what will come next, has made consumers more frugal.

As has been seen in the U.S. and discussed in the UK, the economy needs consumers to be spending to provide activity at a grass roots level that will add to growth throughout the region. So far that is not happening and is adding to concerns about how long it will be before things are back to normal.

For example, it is now believed that the Italian economy, the third largest in the region, will take until 2025 to return to pre-Covid levels. This could easily spread to the smaller countries and become the base expectation. The contraction in Italy’s economy this year could easily exceed 10% but this may not be out of line since Italian spending on Covid relief will be around 5% of GDP and that is in line with other EU members.

There is a major divergence taking place between economies of the Eurozone. That has been exacerbated by the varying degree of support they are able to provide.

Obviously, Germany, with its huge surplus, heads those providing most support. The Pandemic Relief Fund will provide a little relief from that divergence but until the EU behaves as a single fiscal unit there will always be these disparities.

Yesterday the euro rallied a little further versus the dollar. It rose to a high of 1.1351, closing at 1.1330.

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.”