BoE officials to discuss support once fiscal stimulus ends

The Bank of England is preparing for the end of the Government’s various Pandemic Relief Schemes and this week, both the Governor, Andrew Bailey and Chief Economist Andrew Haldane will outline the Bank’s position.

Bailey will probably address the negative rate debate while Haldane will most likely continue his cheerleading for the economic recovery.

While Bailey’s words are unlikely to affect the market in the short-term, Haldane could easily rein in his recent hyperbole.

The economy is in a difficult position with retailers shedding jobs as the effect of the lockdown continues to see consumers revert to online shopping, while schemes like eat out to help out give an illusory impression of the recovery.

That scheme has less than a week to run and has undoubtedly seen high street benefit but with the spectre of unemployment ballooning, children returning to school next week and businesses having to pay more to support their employees, the outlook could change very quickly.

Last week, the pound was reactive to the dollar but looked like it may rally versus the euro. While that is not the overall view of the market, the comparison between the growing infection rates being seen in mainland Europe compared to the actions being taken in the UK means that while facing similar economic issues going forward, the UK may now be significantly ahead in terms of its recovery.

Friday’s closing rate of 1.1096 barely reflects this. The two currency’s proportion of the dollar index basket may be distorting this somewhat.

This week is a fairly barren week for data from the UK, Haldane is speaking on Wednesday afternoon and Bailey at lunchtime on Friday.

The pound was mixed against the dollar last week. It traded between 1.3059 and 1.3267, closing at 1.3088. The base at 1.30 looks fairly solid, but there will need to be a greater divergence between the UK and U.S. economic recoveries for it to break higher.

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Phase two talks delayed as President blames China

In his 2016 Presidential campaign Donald Trump spent a great deal of time blaming everyone else for the state of the U.S. economy. His three favourite targets were China, the EU (predominantly Germany), and (then) President Obama.

Nothing during the four intervening years has changed his stance over China, the difference now is that instead of accusing them of holding their currency at an artificially low level, he is blaming them for just about everything else, but the spread of Coronavirus has been his hot topic.

There may be some blame to be attached to China but since that is the same for every nation, the differences over infection rates, fatalities and the lifting of lockdown are a more domestic issue.

Germany was also blamed for an artificially weak currency despite the fact it is part of the nineteen nations that make up the Eurozone. The threat of tariffs on Eurozone exports remains, but Trump’s sights have been very much fixed on Beijing.

Where Democrat Candidate Joe Biden talks of the issues facing the U.S. over and above the Covid-19 Pandemic, Trump’s team appears to feel that all in the garden is rosy.

It remains difficult to decide exactly what the most significant battlefields will be once campaigning really gets going. Biden has now seemingly abandoned his sit back and wait approach and is very much on the offensive.

The significance of the level of absentee ballots clearly concerns Trump but it is difficult to decide who benefits most from the size of the turnout.

America’s Davos, Jackson Hole Symposium gets underway this week and Fed Chairman Jerome Powell will be making a keynote speech.

He is expected to talk in more general terms about monetary policy, mostly how it is expected to be revamped. This means talking about targets and averages for growth and inflation. The Fed has constantly undershot its target for inflation but that has been of little concern in the current environment.

Next week, there will be a plethora of data releases to accompany Jackson Hole. House Prices, New Home Sales, Consumer Confidence, Jobless Claims, and the final preliminary estimate of Q2 GDP will all be released.

Last week, the greenback was quite volatile in a thin market. It traded between 92.12 and 93.47. It closed on the front foot at 93.20.

French and German GDP to drive currency

Last week, the euro broke an eight-week winning streak versus the dollar, but it is not yet clear if this is the end of the cycle.

With so much to be decided in the U.S. in the coming months the end of this quarter and the beginning of the next are likely to see increased volatility.

The Eurozone, besides the Coronavirus Pandemic, is facing a crisis in Banking and finance. Former ECB President Mario Draghi commented last week on the need to use the Pandemic Relief Funding wisely and make sure it doesn’t lead to a crippling debt burden for generations to come.

The current Vice-President of the ECB, Luis De Guindos said in a speech that he didn’t see banks recovering until 2022 at the earliest. There are plenty of observers who will see that as a fairly optimistic prediction.

This week, the latest cut of Q2 GDP data for Germany and France will be released.

Neither are expected to have changed from previous releases at -11.7% and -13.8% respectively. Brussels has already announced that it expects GDP to grow by 8% in Q3 and given the data released so far that may also be optimistic, particularly since infection rates are climbing in Germany France Italy and Spain.

Italy has already said that another total lockdown will not happen but with the holiday season beginning to wind down and quarantines in place for those returning to the UK from both France and Spain, the outlook may deteriorate.

Last week, the Euro shadowed the dollar index. It traded between 1.1965 and 1.1754, closing at 1.1796.