Baileys comments to eclipse rate decision

When the discovery of a vaccine to halt the spread of Coronavirus was announced, it was proclaimed as a game changer.

Yesterday, the UK announced that the country had passed ten million jabs, and that the target of completing the vaccination of the four most vulnerable groups by the end of next week is almost certain to be achieved.

Indeed, the game does appear to have changed.

The country’s Chief Medical Officer Chris Whitty announced that the science now confirms that the UK is past the peak of the second wave of infections.

He did warn against the relaxation of restrictions in the short term, but the combination of the lockdown and vaccinations means that the UK is about to begin the long road back both economically and socially.

It was announced yesterday that next week, the UK will host a G7 conference designed to seek a degree of collaboration between leading industrialized nations to ensure that as countries begin to emerge that the global economy is sufficiently robust to ensure that the recovery is solid and spreads across the globe.

Data released yesterday showed the effect of the lockdowns on the UK’s service sector. Services output rose a little in the latest survey but remains pitifully weak.

It rose from 38.8 to 39.5. This serves to perfectly illustrate the journey the country has to return to positive output and just how critical the announcements made yesterday regarding the vaccination programme are.

As has been the case in other G7 Central Bank policy meetings recently, the comments from the President, Chairman, or Governor will prove to be far more closely observed and enlightening than the decision itself.

Across almost the entire G7, the actions of the respective Central Banks have been vital to providing a base on which the recovery can be constructed. Now is the time for them to continue to provide support, and historically low global interest rates remain necessary.

The subject of negative rates in the UK will have to wait for clarity until the minutes of the meeting are published since no move in monetary policy will be entertained at this meeting. Andrew Bailey may comment or even be questioned on the subject at his news conference.

Sterling remains at the lower end of its recent range.

Yesterday, it fell to a low, versus the dollar, of 1.3619, closing at.1.3650.

The daily chart is starting to look like a medium-term top has been reached and a deeper correction is necessary before the market even considers the possibility of a test of the 1.40 level.

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Biden to give up on Republicans?

The number of FOMC members making speeches and comments is growing as the Fed is clearly working overtime to ensure that its support for the economy is both genuine and long-lasting.

It seems that the Central Bank sees the need for continuing low interest rates as vital and the level of jawboning will both remain high and support that view.

There is an acceptance of the fact that a chain reaction has started, where dovish interest rate policy contributes to a weaker currency and this, in turn, raises the risk of higher inflation.

FOMC Chairman Jerome Powell got ahead of the game a few months ago when he announced that he intended to move the goalposts in the way which the Fed considers inflation. While the Fed’s mandate is decided by Congress, there is sufficient wiggle room for internal adjustments to be made.

As and when inflation begins to rise in earnest, the FOMC will look at the average level which means that the current 2% target can be breached, significantly so, without alarm bells sounding.

While there is a degree of disappointment over delay in delivery of the new Presidents $1,9 trillion stimulus package, the delay has more genuine reasons than mere political shenanigans that were seen under the previous administration.

President Biden has tried to allay the fears of Republicans over the degree of targeting contained in the Bill.

Biden firmly believes that the entire country needs support both morally and in real terms and is now preparing to abandon a bipartisan approach and force the Bill through with just majority Democrat support.

The dollar index remains weak and the market is slowly coming to terms that the de facto abandonment of the strong dollar policy is a reality.

Yesterday it managed to rally to 91.30 but fell back to close marginally in positive territory at 91.11.

Tomorrow’s release of the first employment report of the year is driving market interest.

The expectation for new jobs has fallen to 50k although analysts appear to be split into a range from -25k to +100

There are several market participants who consider this release and the last as the nadir with improvements set to gain both pace and traction.

Can Draghi haul Italy back to growth within the EU

In a bold and some may say desperate move Italy’s President yesterday invited former ECB President Mario Draghi to form a National Unity Government.

This development, unexpected outside of Italy, may have repercussions across the entire EU as Draghi, being a pragmatic man, could easily decide that the country would fare far better if it were to be free of Brussels’ shackles.

That remains an unlikely premise but the continual chopping and changing, while a feature of Italian politics, isn’t conducive to the way the EU operates.

The clear expectation is that this move will be decisive and provide the country with a solid base on which to build its recovery.

Since leaving the ECB fifteen months ago, Draghi has been strident in comments pointed both at Rome and Brussels in which he has criticized the throwing of good money after bad in various relief programmes.

He believes that the money should have been used to create infrastructure programmes to bolster activity and employment that will show a tangible benefit to both the economy and future generations.

President Mattarella will be hoping that the now immortal use of just three words by Draghi when facing down the financial crisis will come to the aid of his homeland.

Whatever it takes was the phrase, and Italy, facing Coronavirus, political and economic woes needs a sprinkling of magic from a genuine heavyweight.

It could easily be that Italy could embark on a path away from the EU but that would take a monumental effort from Draghi who is Italian first but very much a European.

Elsewhere, EU wide retail sales staged an unexpected recovery in January but has been overshadowed by the fall in Germany, the data for which was released last week.

The euro remains likely to fall but supported by a weakening dollar index. 1.20 is now the markets primary focus. Yesterday, the single currency fell close to that level reaching 1.2004 and closing at 1.2033.