9 September  2020: Sterling falls through 1.30 support

Sterling falls through 1.30 support

9th September : Highlights

  • UK Preparing for no deal
  • Administration official sees no support deal until after election
  • 5.1 million jobs disappear

Brexit and Coronavirus double team the pound

The pound has taken a battering over the past few trading sessions as the market comes to terms with the fact that the recovery in the UK is going to take longer and be more costly than it previously imagined while the Government has to also deal with Brexit trade negotiations.

The negotiations with Brussels have always been fractious since the EU is not prepared to admit that the UK’s departure will be a major blow while Westminster is full of bravado about the brave new world it is looking forward to with free trade deals and greater freedom to negotiate them.

Traders and investors have always believed that the UK is the party most at risk from a no deal Brexit and while Boris Johnson may extol the virtues of simply using WTO rules, if that was the case he would have not bothered asking for the transition period the country now finds itself in.

While the Brexit pot continues to bubble, a further tightening of Covid-19 restrictions is taking place with the Government about to ban gatherings of more than six nationally to try to regain control over the virus.

The data for infections versus deaths shows that it is the younger generation that are contracting it in far greater numbers. The fear among scientists is that while the risk to life is currently under control; with the rate of fatalities remaining relatively low those infected will begin to pass it on to the elderly as has been seen elsewhere.

The recent rise of the pound was always mostly about the weakness of the dollar (easy to say but true nonetheless) although the swiftness with which Sterling has shed the gains it has made over the past few weeks comes as a surprise.

Yesterday, the place of the decline accelerated as the 1.30 level versus the dollar was conclusively breached. It made a low of 1.2980 and closed at that level.

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Globalization to take a major hit

With so much going on including the nation’s recovery from Covid-19, the effect of the virus on the economy, race relations and the small matter of a Presidential election in less than two months, the negotiations between Washington and Beijing have appeared to be on the back burner.

That is set to change as President Trump is about to announce measures to restrict the spread of Chinese technology across the U.S., citing security concerns.

With firms like WeChat, TikTok and Huawei Technologies looking to further penetrate the lucrative U.S. market U.S dominance in the development of technology is under threat.

While the U.S. has embraced globalization and has shifted a great deal of production to Far Eastern countries citing greater productivity and lower costs, it has jealously guarded its software production with firms like Apple, Google, and Microsoft voicing concerns over hacking.

Beijing is sure to retaliate should Chinese firms fail to gain what they consider to be fair access to U.S. markets. This could lead to the introduction of the phase one agreement being scaled back. The U.S. was expecting China to start to import significant amounts of its agricultural equipment but so far that hasn’t begun.

Investors are beginning to believe that the slow but steady improvement in the economy has legs. Recent data releases including the employment report may not have shown the spectacular improvement the President has trumpeted, but despite equity markets suffering major falls, strength is returning to the underlying economy.

The dollar index continues its recovery, now comfortably above 93.00. The 94 level is where there is significant resistance and while there is growing confidence that it will be broken, a period of consolidation may be necessary first.

Yesterday the index closed on its high for the day at 93.50.

But unemployment is still rising

The most significant fallout caused by the Covid-19 pandemic globally has been its effect on employment.

With UK firms seeing mass redundancies tapering off despite a long tail and the U.S. beginning to see slow but sure improvement, in the Eurozone, there has been more of a slow burn as industrial activity points to a slower but more concerning decline in employment.

Two of the more significant pillars of the EU are free movement of labour and the lack of a fiscal union. That could mean that there is a significant shift in the workforce should any improvement seen be regional.

Yesterday saw a further estimate of Q2 GDP and sharpening their pencils, analysts found that the economy contracted by a slightly improved 14.7%, up from -15%, between March and June.

Eurozone Finance Ministers meeting virtually yesterday made yet another pledge to provide whatever support is necessary to ensure the economy returns to health. It seems that when simply voicing their intentions there is harmony but as soon as they are asked to get their cheque books out, disharmony breaks out.

The first face to face meeting since lockdown began will take place on Friday and there is a general agreement that now is not the time to start scaling back support as the threat of a second spike remains.

It is already agreed that there will be no request for any pledge of further funds with the Union exercising its time-honoured tradition of waiting and seeing. That is something they can all agree upon.

Just as it was reactive to the dollar’s weakness, the euro has remained shackled to the greenback as it has recovered. Yesterday the single currency fell to a low of 1.1765 and closed and 1.1777. Support is seen between 1.1740 and 1.1720 and this is likely to be tested should the dollar index look to break 94.

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.”