Dollar’s recovery barely touches Sterling

The UK faces a dilemma as it begins to consider the release of lockdown as despite a high level of pent-up demand which is likely to see inflation begin to rise, there will still be a massive overhang of businesses struggling to get back to where they were pre-Pandemic let alone begin to grow past that level.

It will be a virtually impossible square the circle, as on the one hand retail is expected, despite the damage caused to its balance sheets, to see an impressive bounce back while manufacturing and services struggle to retain customers and compete for orders.

The Chancellor will want to project optimism in his budget but will be acutely aware that reducing support by any meaningful amount could spell disaster.

This means that Monday’s announcement from the Prime Minister of the roadmap for the gradual withdrawal of restrictions will be critical to both the economy and the social welfare of the population.

MPC Member Michael Saunders who has historically been an interest rate hawk spoke yesterday of the possibility that rates may still need to move into negative territory, even in six months time, as employment may, as is being seen in other G7 economies, lag behind the recovery. Saunders’ comments are at odds with the Bank’s own officials who see negative rates as either a contingency or a last resort.

Retail sales data will be released later today and there is a view that they will have fallen a little from December’s strong rally as the lockdown has continued.

This is something of a double-edged sword for the economy since on the one hand, short-term effects add more woe, especially to the hospitality sector while it adds to the demand that will most likely explode like a coiled spring when restrictions are lifted.

The hospitality sector, the most in need of support, may remain the most affected for the longest as the Government pleads for restraint, even after lockdown is eased. It will also need the support to remain in place until it is certain that the restrictions are at an end.

The same will be true of the travel industry together with airlines.

Airlines will also be hit by rising fuel prices as demand grows for oil and the price recovers, the tentative signs of which are already being seen. Yesterday WTI closed at around $60 having risen from a low of $33 last November.

The pound remains well supported with recovery for the dollar index merely slowing its march towards 1,40. Yesterday, it reached a high of 1.3986, closing at 1.3975.

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Jobless claims stubbornly high

Yesterday’s release of the latest figures for jobless claims illustrates the need, as even the staunchest Republican member of congress will agree, for a stimulus package to bolster the jobs market.

It is merely the size of the package and its distribution which remains a stumbling block. It is likely that the formal announcement of when it will happen will come next week.

New claims rose marginally when a quite significant fall was expected, while continuing claims continued to fall, but by nowhere near as quickly as is both demanded and expected.

With the decks cleared of extraneous distractions, the business of putting the economy on the right track should have already begun.

The strength of both the construction sector and home sales is encouraging but this success story needs to spread to other sectors, and it is expected that the stimulus will prove more than just support for individuals most badly affected.

Trends in the overall labour market remain a concern. While it is still two weeks before the February NFP data is released, the effect of the significant downwards revision to December’s numbers is still reverberating through the market and holding back investors.

Federal Reserve Governor Lael Brainard, a strong tip to take over as and when Jerome Powell leaves the post of Chairman, switched her attention in a speech made yesterday from her almost perennial topic of inflation to the effect of climate change on U.S. businesses.

She has launched an initiative to ensure that businesses put measures in place to protect themselves, down the line, to ensure that the pace of economic growth is not to be blown off course.

Swift changes in asset prices could be seen while it is harder to quantify how and where the physical damage will affect operations.

Yesterday, the dollar index lost a little ground proving that any recovery won’t be in a straight line. It fell to a low of 90.54, closing around that level, reversing the gains from Wednesday almost exactly.

Rumblings of discontent remain

The difficulties of the EU’s experiment, in creating a Monetary Union without giving any thought to a Fiscal Union is likely to be brought into sharp relief as and when the economy returns to normal.

The traditional strugglers, those most used to cyclical downturns will need to see continued support for some time to come if the socio-economic makeup of the region is not to be severely damaged. The same is true of the members of the Union who see protection from the Soviet Union as their most significant need.

Greece is still displaying a degree of militancy over its treatment by Brussels at the height of the financial crisis, Italy now being governed by the ultimate pragmatist in Mario Draghi and news filtering through that there is an extraordinary amount of local currency still retained by Spaniards and a number of shopkeepers in rural towns still accepting old money undermines confidence.

Pent up demand will see the return of inflation through the entire region but while the ECB provides lip service to the need for continued monetary support, should prices start to look out of control or the economies of the North start to overheat, the pressure on the Central Bank may become unbearable.

If that were the case, fiscal support would need to be used to balance the effect and that would be fought by the frugal five.

The most recent data from the ECB shows that members of the Governing Council see the current level of support as ample. They do not release voting figures and it could be that the opinion stated is merely anecdotal.

The deflation that currently surrounds the Eurozone may disappear as the lockdowns lift. Should the euro begin to weaken considerably, the effect of a strong currency, decried as the harbinger of falling prices could lamented as a weaker euro would contribute to higher inflation.

Yesterday, the euro rose to a high of 1.2093 and closed close to that level. This was in reaction to a slightly weaker dollar.