Stimulus will begin to be withdrawn after June

As the Bank of England prepares to raise its forecast for growth in the UK for this year, Chancellor Rishi Sunak is preparing to start to withdraw some of the support packages he initiated as the country went into lockdown.

The furlough scheme is already set to end in September.

The consequences for the jobs market are the unknown that will exercise the thoughts of members of the Monetary Policy Committee when it meets next week.

It is still too early for a physical change to official rates, or the level of support being provided thorough QE, but any change in the conversation around negative rates will provide traders with an opportunity to express their views in the FX market.

Should a further lowering of interest rates be deemed necessary in the Autumn, BoE Governor Andrew Bailey has undertaken to provide banks with as much advance guidance as possible.

The reason for this is that such an unprecedented decision will affect the mechanics of the money markets and banks will need to fully understand the ramifications and the technical outcome if there is not to be unintended disruption.

One further support package that will be removed in the coming months is the stamp duty holiday on house purchases. The reduction of this tax paid on the purchase of property has provided support to the market and kept it moving pushing prices higher in almost every area of the UK.

Property experts now believe that the removal of support will not have the devastating effect it could have, had the economy not been in the healthy position it now finds itself in.

The level of positivity driven by the success of the vaccination rollout will mean that the effect of the removal of support will see prices level off rather than fall.

The pound was positively affected by the FOMC meeting yesterday.

Versus the dollar, it rose to a high of 1.3950, closing at 1.3937. It is now probable that the 1.40 level will be tested, and the pound will remain in an upturn although the proximity of next week’s Central Bank meeting may dampen enthusiasm to take it too much higher.

Versus the Euro, the pound remains well supported. Daily ranges have narrowed recently but support remains around 1.1450.

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But the housing market remains solid

The market’s conclusion following yesterday’s FOMC meeting and press conference presided over by its Chairman Jerome Powell was that the Central Bank remains cautious, perhaps a little too cautious given the possibility of a significant rise in inflation.

While Powell has acknowledged the likelihood of a rise in inflation that will exceed its 2% target, it is apparent that the committee is not prepared to dampen the effect of the stimulus provided by the Administration’s actions or its own provision of stability and liquidity to the money markets.

Overall yesterday’s press conference was bullish for the recovery but dovish over inflation.

It was interesting to note that two areas of the economy; housing and employment, that have both been producing positive data, extraordinarily positive in that case of the NFP, are the two areas that Powell chose to single out.

He is not concerned that there is overheating being seen in new or existing home sales. He commented that he is watching home sales closely due to low inventory and high levels of demand. It is clear from his comments that he sees a natural levelling off in demand over the coming months.

He still sees a degree of slackness in the labour market since wages are not increasing by any significant degree. For now, the number of vacancies is enough to see continued improvements in jobless numbers.

Weekly jobless claims will be released later today and are expected to continue to fall.

Powell went on to say that the decision to leave both interest rates and the level of support unchanged will be under constant review. It is not yet time to discuss the tapering of support but there will be no need to wait until we have reached our goals to begin to reduce support,

The dovish nature of the press conference was founded upon the FOMC’s concern that the recovery is, in Powell’s words, still uneven, still incomplete,

The dollar index took a hit from the Fed’s continued dovishness as the market was disappointed not to hear how the Bank will tackle rising inflation.

It fell to a low of 90.55, closing at 90.60. The fall was perhaps not as steep as may have been expected but the reaction of the European market today will be significant.

Rapid growth expected in H2 as more jabs delivered

Christine Lagarde, ECB President, spoke yesterday of the need for negative interest rates to remain in place while the recovery is still in its early stages.

Even before Central Banks began to flirt with taking interest rates into negative territory analysts and economists spoke of the addictive effect of such a policy since the full effect of changes in sentiment could not be effectively modelled.

While disaster was predicted by the advent of QE during the financial crisis, negative interest rates have been viewed of something of a curiosity with their withdrawal almost as significant as the original move.

Lagarde believes that the Eurozone economy will see rapid growth in the second half of the year but is not yet prepared to put numbers to her expectation.

She is clearly pinning her hopes on the effectiveness of the rollout of the Covid-19 vaccination. The painful truth is that only around 25% of the population have received their first dose. This compares unfavourably of the successes seen in the UK and the rapid improvement in the U.S.

It will take time, probably the rest of the current quarter for the data to improve and only then can a rapid reopening be considered. Lagarde predicts that 70% of the population will have received their first jab by the end of June.

The rollout of vaccines provides a light at the end of the tunnel, but in the short term, the lockdowns brought about by the third wave of the virus are a significant drag on both the current state of the economy and prospects for a full recovery.

Following yesterday’s FOMC meeting the ECB appears to have been let off the hook regarding inflation. Given the rally seen by the euro yesterday, the Central Bank won’t need to put any measures in place or reduce its support given the dampening effect of a strengthening currency.

The single currency rose to a high of 1.2134, closing at 1.2127. The next target is resistance at 1.2180 which represents the high from late February.