Returning economy clouded by jobs outlook

The pound continued its recent rally last week as technical indicators continue to amount to very little as a clue to its direction.

Given the storm clouds that are gathering for the country and the economy, the pound’s rise to its current level appears unsustainable. However, it could easily extend to test the 1.30 level but having reached its highest level since the lockdown began, the Covid pandemic may have had all the effect it is going to as Brexit and the ongoing row with China prove to me more immediate concerns.

Retail sales are now back at the level that was seen before Lockdown began but the effect of the rule on facemasks will have some effect. It is hoped that it will provide encouragement for those with concerns over catching the virus, while it may also deter those who find them uncomfortable.

With Chancellor Sunak watching closely, having reduced VAT, and paying towards restaurant bills from next weekend, the total of support that the economy has received is still mounting.

Having to find the funds to balance the books and pressure from the Prime Minister’s promises over public spending still fresh, Sunak’s autumn statement will depend a great deal upon what happens between now and then.

Spain’s second spike (see below) will have a bearing on the UK, whether that is just precautionary, or a second spike begins. Either way the UK is bound to be affected.

Last week, the pound reached a high of 1.2803, closing at 1.2793. This week, lending data and house prices, neither of which are top tier indicators are due for release. That means that the pound will be driven by the path taken by the dollar unless there is movement on Brexit or a flare up with China.

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FOMC needs Congress’ decision

The FOMC will meet this week. In advance of the meeting, the market will not have any idea of what Congress and the Treasury have discussed and potentially agreed over renewal of relief for workers whose jobs have been affected by the lockdown.

Irrespective of the relief package, the Fed is going to have to act again given the fact that the recovery is already taking longer than had been previously expected, perhaps taking until Q1 or even Q2 next year before growth is seen again.

Last week, the dollar continued its recent fall. It is a fairly moot point why the dollar has been such a victim of the current global situation.

I have said before that it is glib to say that while investors remain risk inclined; the dollar’s safe haven status sees it suffer. The U.S. is genuinely struggling to break free from the effect of Covid-19 and analysts both domestic and international are losing faith in the ability or the desire of the Administration to deal with the continued fallout now that their first lockdown withdrawal plan has clearly failed.

With around 30 States still reporting increases in the number of cases reported even though President Trump puts that down to increased testing, it appears that the hopes of an entire nation are being placed in the hands of those manufacturing a vaccine.

Last week, the dollar index fell to a low of 94.32 and closed within just two pips of the low. This was its biggest weekly fall since the week ending 27th March. The pace of the fall is clearly increasing having reached its lowest close since the end of September 2018.

However, with the market now oversold the index, natural buyers may slow the fall and while the dollar may remain weak and depending on the actions of the FOMC the bottom of the range may be approaching.

Euro enjoying a week in the sun

It is hard to be a naysayer around all the excitement that has been generated by the EU Heads of State agreeing to create a fund that will provide those nations suffering the worst of the effects of the pandemic. It also feels churlish to try to pick holes in what is clearly a landmark decision taken by a dynamic and forward-thinking group who are ready to make sacrifices for the few, on behalf of the many.

Hard and churlish it may be but here goes.

The agreement under which a Pandemic Relief Fund has been agreed does not provide Eur 750 billion of new funding to deal with the crisis, since the part that is made up of grants is part of the new budget and the part that is by way of loans must be repaid.

The fact that the EU is about to issue common bonds is, I agree, a massive leap of faith but it is fairly obvious that it will be Germany who provides the support while others dither since it is the only Nation with a truly global presence.

Should there be even the slightest whiff of a default, Germany will be the ones to either take on the obligation or add more funds.

In true EU style, the issue has, in essence, been kicked down the street as the funds to start projects that had originally been part of the new budget will now be redirected to pandemic relief. This will create a slowdown in infrastructure investment just as the region needs to to promote growth.

Last week, the Euro enjoyed some time in the sun as the strongest G7 currency, but how much longer it can rise at its current pace is difficult to say. It depends on this week’s FOMC meeting, the confidence and activity data that will be released this week and whether the smoke and mirrors can continue to distract traders and investors.

It is unclear just what the rise in infections in Catalonia will mean for the entire region as the UK has acted with a degree of anticipation not seen over the entire pandemic in suggesting anyone returning from holiday in Spain quarantines for two weeks.

Last week, the single currency rose to a high of 1.1658, closing at 1.1656. Coincidentally, that is also its highest close since late September 2018.