Brexit becomes prime priority for the Government

The continued efforts of the Government to gain control over a second spike in Covid-19 cases is being usurped by the return of Brexit as the current most significant driver for Sterling.

It is difficult to understand what reaction the Prime Minister was expecting from Brussels other than shock and anger as he has introduced a Bill into Parliament that could potentially derail what has already agreed and is applicable under international law.

The Internal Market Bill gives Ministers the right to override the agreement over treatment of goods flowing to and from Northern Ireland. This undermines one of the more controversial sections of the Withdrawal Agreement and could bring the entire process to a shuddering halt.

Any future relationship between the UK and the EU is now in serious jeopardy with Brussels threatening legal action if the Bill is passed, while Boris Johnson refuses to back down. This goes above and beyond no deal as an outcome of the negotiations. As a tactic to ensure that the EU backs down over the two outstanding disagreements over the future relationship, it is brinkmanship at its most extreme.

Every other driver has been swept aside as the pound reacted poorly to further controversy over Brexit.

U.S. House Speaker Nancy Pelosi added to the pressure on the Government to back down by confirming her earlier comment that there is absolutely no chance of a trade deal between the U.S. and UK if the agreement that has been reached over Ireland is undermined in any way.

The pound had its worst day in six months as it fell to a low of 1.2773 versus the dollar and 1.0786 against the euro.

Further volatility is likely and having crashed through several support levels the outlook for the pound remains bearish unless there is a significant change in the Government’s position.

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Democrats reject slimmed down Bill

A Republican sponsored relief Bill that was put in front of Congress yesterday was voted down by Democrats as it did not include State and local Government relief and food assistance.

In a reminder of the overriding difficulty the UK Government faced when it fell into a minority prior to last December’s election, the Republican Administration will be unable to pass any form of Bill to support small business and the unemployed without including the measures seen as vital by the Democrats.

Knowing the approach that has been followed over his entire Presidency, Donald Trump is almost certain not to back down in any way.

The issue of a relief is likely to continue right up to the election with the effect on those who need it most potentially devastating.

Yesterday’s weekly jobless claims data gave little solace to those out of work as they were joined by 884k new claimants as the recent fall in job losses stalled.

Continuing claims rose by 100k from 13,282k last week to 13,383k this week.

While the Fed and Treasury won’t attach too much significance to a single week’s data, they will be concerned that the numbers are not improving at a far greater rate.

Goldman Sachs, the global investment bank issued a report yesterday in which it says it expects the U.S. economy to grow by 35% QoQ in Q3. While this is a seemingly spectacular return to growth, it follows Q2’s contraction of a similar amount, so, while positive, it is also in line with market expectations.

The dollar index is also seeing volatility as both the euro and pound gyrate significantly. The index fell to a low of 92.69 yesterday but climbed back to close at 93.39.

ECB Presidents optimism sparks rally for single currency

The euro reacted positively to a highly optimistic press conference from ECB President Christine Lagarde yesterday following the Central Bank’s monthly meeting.

Lagarde played down any fears the ECB has over the recent strength of the single currency and despite misgivings over the economic recovery, the market in time honoured fashion, took that as a signal to buy.

Lagarde also commented that she saw that the entire EU is experiencing a strong economic rebound. Again, as in the U.S. that rebound merely takes us back levels seen at the start of lockdown. It must also be remembered that Brussels was facing systemic issues that saw it fall into recession even before the pandemic really took hold of the economy.

The overall effect of Covid-19 on the economy is expected to be slightly less than originally expected but the recovery may take longer than previously announced.

Growth in 2021 is expected to be at 5% marginally lower than the previously expected 5.2%.

Lagarde was at pains to remind analysts that the level of growth is still threatened by the future evolution of the virus and the success of containment measures. She also confirmed that the risks to the economy remain skewed to the downside, despite her more upbeat expectations.

Inflation expectations were left unchanged and Lagarde barely even acknowledged that the region had fallen into deflation last month.

She acknowledged the recent strength of the euro but said that the Bank would not undertake any measures to weaken the currency. It therefore rallied versus the dollar, reaching a high of 1.1917, but quickly fell back to close at 1.1815 as no real basis for continued buying was found and profit taking set in.