Warnings over economy and Brexit fears hit pound

Bank of England Governor Andrew Bailey’s warning this week that the UK is facing a long and difficult road back to financial health has coincided with the market’s view on the U.S. economy and therefore the dollar improving and the two together have combined to take the wind out of the sails of the pound.

Several members of the MPC have spoken recently about their concerns over growth despite the Bank being determined to provide all the support it can.

There seems to be a tipping point on the horizon at which time the economy will require more aid from the Government and BoE than both combined are able to provide.

Concerns are growing that the Government’s optimism while it was providing support to workers who were furloughed was misplaced. As the various schemes wind down with the furlough scheme ending completely at the end of next month, employers simply won’t be able to retain staffing levels at pre-Pandemic levels leading to significant rise in unemployment.

One member of the MPC, Gertjan Vlieghe, sounded a more positive note on employment earlier in the week, but he is likely in the minority now.

One positive on the employment front is the shift that is happening in the online retail sector.

There has been gloomy news from the High Street with several major names falling foul of the lockdown while others have been shedding jobs. However, the rise of online sales has seen three firms opening up employment opportunities.

Tesco are adding 7k new jobs, Marks and Spencer are beefing up online food sales while Amazon announced yesterday that it is looking to take on both permanent and seasonal operatives in the coming weeks.

One further issue facing the country is Brexit. While the economy continues to rely on its services sector, a trade agreement with the EU is still far from settled. It is becoming more and more likely that the UK will finally break all ties with Brussels in January with no deal in place.

The pound’s correction is looking like a reversal now having seen a fall to 1.3242 yesterday, closing at 1.3263. Perhaps more significantly, the recent rise versus the euro has hit the buffers. It fell to a low of 1.1189 yesterday and closed at 1.1205.

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Dollar recovery look to have some merit

In financial markets, what goes around comes around, eventually.

While there were dire predictions over the relative strength of the U.S. economy with fears of a complete rout for the dollar rising, paradoxically, the greenback starts to pick up, weekly employment data improves and suddenly traders view today’s NFP data with a degree of confidence rather than trepidation.

In the case of the U.S. the size and diversity of both the economy and currency mean that any turnaround is akin to stopping an oil tanker and there will never be agreement in markets over what is and isn’t a positive signal.

Optimism among traders could easily see today’s NFP number as positive despite a projected fall of close to 300k new jobs from last month. Dollar bulls will point to the fact that the economy created (a predicted) 1.4 million new jobs in August and that is proof positive that the recovery may not be V-shaped, but a U isn’t out of the question.

Despite this week’s show of optimism, there are still concerns among analysts, similarly to the UK, about what will happen when the Government turns off the spigot and the economy has to support itself.

Lack of support could lead to rising unemployment, the unemployed do not spend, while those in work tend to become more frugal and thrifty which can contribute to a slowdown in retail sales.

Since that sector contributes around 70% to the entire nations GDP, the Administration, whether Republican or Democrat after November, faces a difficult task in balancing the books, while the natural inclination is for the Federal Government and State Legislatures to expect individuals to support themselves.

The dollar index’s rally continued yesterday as it reached a high of 93.07 but fell back on a bout of profit taking to 92.76.

Fears of longer than expected recovery lingering

The track record of the Eurozone economy is one of an almost continual stagger from one crisis to the next. While that scene drives many to question the entire project and its ability to survive, survive it does.

The 2008 financial crisis was entirely predictable and was the major reason why analysts questioned the one size fits all monetary policy that saw low interest rates across nations that were used to a high inflation, high interest rate culture. When the borrowing bubble burst, the effect was close to fatal.

However, a Pandemic, despite being on Brussels’ list of possible concerns was never expected to arrive so suddenly and violently and this has driven different questions about the unity of the region.

One of the more surprising outcomes of the early stages of the Pandemic was the closing of individual nations’ borders to stop the spread of the virus. It led to a belief that policies of every man for himself were being enacted.

This feeling was exacerbated when it took an inordinate time for a relief fund to be agreed and even now, certain nations are trying to pull on the reins to ensure that funding is only being delivered to where it is most needed and are desperately trying to hold back part of the Eur 1.35 trillion until it is certain it is needed.

Cynics will continue to say that this lack of unity is going to see an eventual breakup of the Union while others point to a complete lack of a fiscal agreement.

However, one nation is the glue that holds the region together and while Germany continues to show both commitment and support for a unified Europe and relatively localized issues come to the fore, a future of some sort is certain.

Softer than expected economic data this week has had an adverse effect on the single currency but a sustained rally above 1.20 to the dollar was never likely to materialize. The rise of the single currency has been a contributory factor in the region falling into deflation.

Yesterday, the euro fell to a low of 1.1789, but recovered to close at 1.1851, just a few pips lower on the day.