Possibility of roadmap for easing lockdown helps appetite

With the return of Boris Johnson to lead the Government’s response to the Covid-19 pandemic, there is a degree of optimism growing that the UK lockdown will start to be eased.

This is despite Johnson’s comments in his speech on Monday that he is not prepared to sacrifice all the good work that has been done so far by rushing into loosening the restrictions on shops and businesses.

As more evidence is revealed of the decline in economic activity large corporates are beginning to feel the pain and react in an effort to save their businesses.

There were two further examples yesterday as British Airways announced that it plans to make 12k staff members redundant across its entire operation while one of the country’s oldest Department stores, John Lewis, revealed that not all of its 50 stores nationwide would reopen after the lockdown.

The financial markets have found themselves in something of a state of limbo so far this week but that is about to change as both the U.S. and Eurozone Central Banks make interest rate decisions and announce plans to continue to prop up their respective economies.

Both countries will also announce preliminary GDP data, America today and the Eurozone tomorrow. Sterling has become a mirror image of the dollar as a rise in risk appetite sees Sterling rise and the dollar fall while the opposite happens as risk aversion takes over.

Yesterday, the pound traded between 1.2403 and 1.2518 against the dollar, closing at 1.2424 just seven pips lower on the day. Versus the euro, Sterling has remained in a relatively tight range as it has recovered from its fall at the start of the pandemic. It has traded between 1.1280 and 1.1499 over the past two weeks.

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Fears of a 4% fall in GDP continue

There is a degree of trepidation throughout the market that today’s release of preliminary GDP data for Q1 could reveal a far weaker economy than had been expected just a few weeks ago.

Analysts fear a contraction of up to 4% in Q1 although they also agree that whatever today’s data reveals, Q2 will be far worse.

At his press conference this evening following the FOMC meeting, Fed Chairman Jerome Powell is sure to be guided by the report. It is difficult to predict the path of the dollar today since if GDP is as weak as feared it would, in normal times, ses the dollar decline as the Fed would be bound to loosen interest rate policy to try to boost activity but with interest rates already at zero, it is likely that a fall in risk appetite will bolster the greenback and it could actually rally a little.

With the Fed’s massive relief effort still coursing through the markets, there is no expectation of any dramatic announcement from the Chairman later, but he will be expected to answer some questions that have arisen as the U.S. passes the peak of the pandemic.

What is the endgame for the open-ended QE that was announced in late March?

Powell will want to avoid rates slipping below zero so may announce some plans around that but overall, it is expected that he will talk about growth (or lack thereof) and discuss how the actions taken so far have worked.

Yesterday, the dollar index traded between 100.21 and 99.44, closing within a few pips of its opening level at 99.98

But Lagarde prepared to throw Italy under the bus

Tomorrow’s ECB meeting may turn out to be more political than financial as Christine Lagarde prepares to expand on her recent comments regarding where the Central Banks responsibilities lie during the current and ongoing crisis.

Having confirmed recently that it was not within the ECB’s remit to come to Italy’s aid in the bond markets, which saw Italian Government bonds fall to their lowest level in a decade, she is bound to be questioned about just what she sees as the Central Bank’s role.

The President of the EU Commission Ursula von der Leyen has been galvanized by the urgency of action that is needed to stem the economic fallout from the slowdown although trying to bring all parties together will be a little like herding cats.

The only consensus so far is that something must be done but getting agreement on just what that will be is far from clear. It is certain that there is a cost involved and the burning question is who pays it.

Von der Leyen is looking at a Eur I trillion package of measures but that has a degree of desperation attached. It could be that she is using the shock value of such a high price to drive the relief effort forward.

The questions remain; what form will the trillion take? Who pays it? Who receives it? And finally, what does it have to do with the ECB? As has been seen in the U.S. and UK, Central Government has been heavily involved in the bailout of business and industry as well as individuals hit by the pandemic, with the Central Bank acting in a more technical role. There is no such cooperation in the Eurozone so far and pinning any hopes on tomorrow’s ECB meeting may be futile.

While analysts still expect a significant fall in the value of the euro, so far it continues to just about hold its own. Yesterday, it rose to a high of 1.0888 and closed at 1.0819.