Today’s data to provide gauge of negative outlook

Sterling has taken something of a backseat for now as the market turns its attention to a strengthening dollar and a Eurozone that is under pressure to act in a more united way to both deal with the Covid-19 pandemic, and the economic downturn which has already started.

The pound has had something of a rollercoaster ride over the past month as the Government and Bank of England announced a stream of measures to help businesses and individuals cope during a period of almost complete lockdown. This has brought home, for anyone in any doubt, just how strong the link between consumers and the economy really is.

It is only when every person is affected by such an event the effect is truly felt. Although the 2008 financial crisis was a significantly serious event, many lives were barely touched. However, this is totally different; it has affected every business; public or private, every household; big or small and every individual; rich or poor.

The recovery from recession that is certain to follow will be slow and painful and despite looking like the severe recessions of the 1970’s, this will be characterized by a we are in this together attitude which should hold the country in good stead. The recession will be a consequence of a natural event rather than any ideological management of the economy which should also bring the country together with a degree of both purpose and understanding.

The pound has been relatively steady this week as the markets look to the future and cannot decide just how severe the effect on the UK will be.

Today’s release of services output data will follow the manufacturing sector in a dramatic fall, and this may set the course for Sterling over the next couple of weeks. Output is likely to be somewhere in the low 30’s, with anything worse setting the currency on a renewed downwards trajectory.

Yesterday, Sterling traded between 1.2475 and 1.2398 versus the dollar although it continued to recover versus the euro, reaching a high of 1.1441.

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Demand for dollars remains strong

Following yesterday’s weekly jobless claims which more than doubled from the previous week’s truly awful result, the market’s concentration on the effect of Covid-19 on the U.S. labour market will be made even sharper by today’s employment report.

The Challenger report on private sector job losses, released yesterday, leapt from 56.6k to 222.2k in a month.

Today’s headline figure for non-farm payrolls will be negative and is likely to show between 100k and 150k jobs have been lost. The market is well primed to expect such a poor but not yet disastrous figure, so that may not hit the dollar as hard as many will predict.

First, there is still significant demand for the dollar globally which takes no notice of stresses in the U.S. economy. There may also be some relief, provided the headline is not truly disastrous but that may even be seen as something of a positive since the sooner the bad news is out, the sooner a recovery can begin once the effect of the virus fades.

The severity of the outbreak in New York State is unlikely to be repeated across the entire country although when it will reach a peak is impossible to say.

The U.S. will also release activity data today as well as the employment report. That will also take a hit and were both reports to be considerably worse than expected the U.S.’ projected recovery could be in jeopardy with repercussions across the entire global economy.

Yesterday, the dollar index continued its recent recovery. It reached a high of 100.41, closing at 100.10. The break of the 100 level looks more sustainable this time as there has been very little selling above that level.

Sentiment and activity data possibly even worse

As the market looks forward to next week’s release of the Finance Ministers report of the options available to the Eurozone to produce a united response to Covid-19, their expectations range from scepticism to dread.

This week’s data has shown that the decline in activity has been historically large and upcoming data is unlikely to be any better.

Data has shown that the economy is operating at around 65% of capacity. Recent figures when collated put this year’s contraction of the pan-Eurozone economy at around 5% with next year’s GDP also falling, by 3.5%.

Meanwhile the ECB is doing all it can with one hand tied behind its back to ensure that there is no credit crunch as it extends both the size and reach of its Targeted Longer-term Financing Operations in its third version.

Unemployment and failing businesses, in economies that can barely stand further setbacks will see the economy recover in two, possibly three stages. Meanwhile any rescue plan while being open to all will obviously have more effect on nations like Germany than it will on Italy or Spain given their relative starting points.

The euro has replaced Sterling as the focus of the market’s reaction to Covid-19. It seems that every negative story is viewed through a lens of its potential effect on the EU.

Yesterday, the euro fell to a low of 1.0820, closing at 1.0856. There is clearly a degree of commercial buying interest at lower levels but if the major investors and hedge funds believe that parity is the next major point for the euro, it is doubtful that the existing buy orders will stand in their way.