Sterling rallies as lockdown eases

The pound continued its recent rally as the latest round of lockdown easing started. Schools reopened for certain age groups while several open-air businessses were able to start trading again.

Yesterday’s release of data for manufacturing was as predicted a very slight improvement on the April figures. This strengthened the market’s believe that the economy has, in fact, bottomed out as has been predicted recently.

One slightly worrying, yet possibly also encouraging fact, is the growth in short positions in Sterling as reported by the Chicago Board of Trade. Shorts have grown to their highest level in five months which is something of a double-edged sword.

First, there is clearly a bearish sentiment still pervading the market and at some stage this rally will run out of steam. With traders net short, any fall should be reasonably shallow, but it could attract further sellers who believe that the currency cannot rally further with the triple pressures of the recession, negative rates, and Brexit.

However, there will also be a school of thought which says that if the tipping point can be found when the losses become too painful for the shorts, then their stop losse orders could lead to a further rally. Of course, there is one further imponderable and that is the performance of the dollar, given the rising tensions in the U.S. (see below)

The volume of data across the entire G7 universe this week together with the ECB meeting will provide a clearer picture of any trends by the end of the week.

Yesterday, Sterling rallied versus the dollar to a high of 1.2488, closing almost at the top for the day.

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Markets discounting any long-term effect

It is ironic that the dollar has been reacting negatively to the rise in risk appetite around the world as the grip of Covid-19 remains tight, yet as risk to its own economy, safety and politics its own streets rises, risk appetite remains strong.

As riots have been seen across the U.S. and in certain places further afield, the pandemic has taken a backseat as the public protests injustice it has in Minneapolis recently.

The ramifications of the George Floyd incident will continue for some time but eventually a state of calm will return. The most obvious victim, longer term could be the President who has made this into a political issue by questioning several Governors (mostly Democrat) actions and motives and labelled them soft on crime.

The continued rioting will, at some point be recognised as a factor in the spread of Covid-19 and that will have an overall effect on the economy as lockdown continues to be delayed.

Despite close to a week of riots and the National Guard being mobilized as similarities to 1968 were drawn, risk gauges remain in positive territory.

As far as the economy goes, this will be something of a pivotal week. Weekly jobless claims are expected to fall below two million, the employment rate is expected to be close to 20% and output from major sectors of the economy will remain weak.

The dollar index has fallen on eight of the past eleven trading days as across several G10 nations activity has begun to rise. At some point there will be an equilibrium found where global economic demand will falter, and the slowdown will begin in earnest with different economies moving at different rates.

That will be the point when the rally in the dollar index will begin again but it may be some time in coming.

Yesterday, the index fell to a low of 97.82, closing at that level.

Recovery plan struggling for traction

The point of the European Recovery Plan is that it needs to be deployed where it is needed not in a couple of months, not next month but next week. While there have been very few headlines about what the fund will entail, how it will be distributed is also shrouded in mystery.

It is assumed that Spain and Italy will be the most significant recipients but that is no more than an assumption since the details are yet to be published.

The ECB will meet for its regular monetary policy consultation on Thursday and as usual despite not having the tools to affect the situation positively, its President, Christine Lagarde will be expected to claim that liquidity as provided for by bond buying and the TLTRO is perfectly placed.

However, it is not banks who need access to funding to stimulate the economy. As has happened in the U.S. and to a certain extent in the UK the only method to support the economy quickly and efficiently is to hand the population cash and encourage them to spend it. Such a radical plan cannot find traction in the Eurozone because the fiscal balances between the members remain unmatched and separate.

Yesterday, Manufacturing PMI was released. This fell slightly which makes this monthan outlier compared to other major economies. Such negativity didn’t ruin the euro’s recent rally and it managed to claw its way to 1.1154 although the lpace of the rally appears to be slowing. It ended the day at 1.1134.