Johnson hints at delay

The Queen produced the quote of the week when posing for a photo with G7 Leaders. She asked are we supposed to look like we are enjoying ourselves?”

It is likely she wasn’t the only one asking the question although most kept it to themselves.

The G7 Summit hosted by Boris Johnson was a qualified success, with general consensus around the major issues.

There were plenty of sidebars to the main event with Johnson displaying his usual bonhomie to EU leaders, although beneath the surface the level of trust between London and Brussels continues to be an issue.

French President Macron appeared at one point to promote Northern Ireland as not being part of the UK. Maybe this was an advance warning of the EU’s position on a united Ireland.

With now less than a week until the Roadmap to Freedom reaches its final stage, there is still no firm decision from the Government about whether there will be a delay.

There have been several calls for a delay citing a lot of different reasons: the rate at which the delta variant is spreading, the proximity of the end of the school year, confusion over foreign holidays and the rate of hospital admissions have all been mentioned.

Johnson wants to make sure that he can keep the country moving forward, so a soft lifting of more restrictions with the complete withdrawal delayed for four weeks.

Data released last week shows that the recovery from the Pandemic is on course. It is unlikely the delay in the full withdrawal of restrictions will have a significant effect given the freedoms that are in place following the most recent developments.

The pound continues to await developments from the FOMC and with a further week until the MPC meets, this is going to have another reactive week.

Last week, it was in familiar territory versus the greenback. It traded between 1.4190 and 1.4070, closing at 1.4104.

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A big week in prospect

As far as the markets are concerned, the time has come for the FOMC to have that conversation. The only question now, is will Jerome Powell and his colleagues comply?

That conversation surrounds the need for a tapering of bond purchases that will eventually lead to a tightening of monetary policy and higher interest rates.

Last week the latest data showed that U.S. inflation reached 5% in May this is its highest rate since April 2008.

The Federal Reserve is not looking at inflation as an absolute, and no one can accuse them of being unaware that their actions would bring us to where we are today.

In fact, if was Powell who first pointed out is expectations for rising inflation several months ago,

No one is surprised that inflation is at the level seen in the latest data, in fact the surprise would be if this wasn’t the case. Powell continually refers to transitory inflation, and we now understand that to mean that it is linked to the stimulus and not any structural event.

This means that as the stimulus that has so far been provided seeps down through the economy and supply bottlenecks fade, inflation should begin to come back under control, although it will need the help of tighter monetary conditions to do so.

It may be that the FOMC may want to see just one more set of employment data, before acting, but there is certain to be a conversation to understand the views of the Regional Fed Presidents who make up the Committee.

Powell may remain guarded in his comments following the meeting, and analysts may have to disseminate some nuances, but is close to certain that he won’t give the degree of advance guidance that the market will hope for.

Last week, the dollar appeared to be gearing up for a major move, most likely upwards. It traded up to test resistance at 90.60 reaching a high of 90.61. It closed at 90.50, poised to react to any positive FOMC comment.

ECB expecting slow and steady recovery

Yet again, the ECB has dealt with an issue by not dealing with it.

Despite reasonably solid data showing that the recovery is beginning to become established, the Central bank continues to pour support into the economy.

There will be Central Bankers around the capitals of the frugal five who are gritting their teeth over rising inflation and hoping that the genie can be put back in the bottle as quickly as it was released.

Brussels continues to want to play hard ball with the UK over the issue with trade flowing through Northern Ireland. Technically, Belfast remains within the EU, being subject to its rules and regulations.

President Macron took the whole thing one stage further at G7 by suggesting that the North is not a part of the UK. His intentions are unclear, although it brought a stinging response from both the Prime Minister and Foreign Secretary.

Macron is in deep trouble at home and is maybe trying to deflect attention by appearing to take on a more Federal role representing Brussels, which is where he probably sees his future.

Angela Merkel was in Cornwall but kept a very low profile, possibly concerned about questions regarding the improving relations her country has with Moscow or maybe simply savouring her last such shindig.

With activity and growth in the region improving, the time is fast approaching for the ECB to consider tapering. Christine Lagarde is unlikely to be allowed the luxury of any delay as her U.S. counterpart has received since concerns over rising inflation are set to rise in the coming weeks.

Last week, the euro looked set to break support and possibly drop back towards the 1.20 level versus the dollar. It reached a low of 1.2092, closing at 1.2107.