Lack of tests could bring a second lockdown

The pound is facing a turbulent time as several factors combine to drive volatility higher.

Brexit and Covid-19 are the headings but within those two topics are subplots that could drive the currency in either direction.

A second wave of infections looks to have already started and the unpreparedness of the Government to provide tests is both surprising and worrying.

By his own admission, Prime Minister Boris Johnson believes that a second wave of infections would be a major disaster on many fronts. The economic fallout from a second lockdown would be catastrophic for the economy.

Given that the recession caused by the earlier measures will take until at least 2022 to fully recover from, there is no telling just how a second lockdown could be effectively dealt with socially and economically.

It is becoming ever more obvious that until there is an effective vaccine available not just in the UK, but every country will be on a knife-edge socially, politically, and economically.

Brexit is also going to bring additional volatility as the likelihood of the UK cutting all ties with Brussels at the end of the year with no deal in place fluctuates.

The introduction of the Internal Market Bill, which is currently passing through Parliament, has brought a new negative dimension to the negotiations.

Brussels has threatened to walk away from talks if the Bill passes but yesterday EU Commission President Ursula von der Leyen sounded a more optimistic note virtually writing off the Bill as a distraction and remaining convinced that a trade deal can still be done.

She told the Financial Times in an interview that it is better not to have the distraction of questioning an agreement that is already in place and binding under international law, but both sides must focus on getting a deal done.

The Bank of England’s Monetary policy Committee met yesterday and as expected left rates and QE unchanged. However, the minutes of the meeting show that the Bank is preparing the way for negative rates should the Pandemic bring further disruption to the economy.

The pound fell immediately following the announcement but quickly recovered after von der Leyen’s positive comments on Brexit.

It traded between 1.2999 and 1.2864 against the dollar, closing at 1.2957 just eight pips higher on the day.

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Encouraging data damped down by Powell caution

The gap between reality and wishful thinking concerning the U.S. economy is beginning to grow wider.

FOMC Chairman Jerome Powell is clearly trying to inject a sense of realism into matters projecting an optimistic yet cautious note into proceedings.

The market is torn between encouraging data on the one hand and a Central Bank that big business, driven by the Administration, sees as a little too cautious.

While equity markets appear to be becoming remote from the real state of the economy, as low inflation and low interest rates drive the search for a return on investments, the continued lack of an agreement over a Pandemic Relief Bill drives the real economy lower.

The Proximity of the election is also a factor in the current market’s perfection of the recovery from the Pandemic.

As things stand in opinion polls, Democrat Joe Biden holds a healthy lead, but it is interesting to note that since the Conventions where Biden and Trump were nominated, Biden’s lead has fallen a little. He does, however, maintain a significant lead in most of the States that are likely to be key battlegrounds come November.

Biden’s slight loss of confidence may be due to the fact that the anyone but Trump voters have changed their minds a little since Biden became more vocal and his rhetoric over policy stance turned voters off.

Confidence in the Fed remains very high but the lack of movement on the fiscal front is, in Jerome Powell’s own words, a significant factor in the pace of the recovery.

Reaction to the weekly jobless data is creating a glass half full mentality. On the one hand the fall in initial claims continues, while continuing claims appear to have plateaued. Again, the lack of movement on a relief bill is seen as crucial.

Yesterday, the dollar index tried to rally reaching a high of 93.60 but was unable to sustain gains and it fell back to close at 92.90.

ECB gives banks 73 billion EUR lending boost

It is becoming a continuing yet worrying theme that the ECB, unable to find a permanent solution to the underlying banking crisis in the Eurozone, allows banks a little more leeway to continue to operate.

It has been seen on the relaxation of how bad loans are accounted for, the changes that were made to the original instructions over dividends and bonuses and now what is considered as part of the bank’s leverage ratio has been changed.

What this means in effect is that banks in the region, as a whole, have been provided with the ability to lend a further Eur 75 billion to their customers without having to put aside as much of their own capital.

This is a subtle change but used properly could be effective, yet the history of EU banks tells us that it could also be seen as throwing good money after bad.

In its communique announcing the change, the ECB cited the changes brought about by the Pandemic and confirmed its willingness to be unorthodox in its efforts to provide financial institutions with additional tools to help their customers survive.

This week’s data releases, both leading indicators and rear-view mirror have been positive with industrial production continuing to rise and business confidence improving. The lack of a continued upwards trend for the euro could indicate that the market is more concerned about the longer-term prospects for the single currency and the 1.20 level versus the dollar now appears to be a solid barrier.

Yesterday, the single currency reached a high of 1.1852, closing at 1.1848 having recovered from a low of 1.1737.