Sterling higher but pace of rise slowing

The rise in the value of Sterling has clearly been primarily driven by recent weakness in the dollar and there is a distinct feeling that a correction from current levels is a more likely scenario than a continued drive towards the 1.3000 level.

The two main issues facing the UK Government; Covid-19 and Brexit will remain throughout the summer with the end of this month set to be a watershed in its dealing with both.

June 30th is the latest date that the UK can request an extension to the transition period that was agreed between the UK and EU towards the end of last year. The transition from full member of the EU to trading partner has been completely overshadowed by the pandemic but as things stand the UK will be leaving without a deal and most likely reverting to trading with mainland Europe under WTO rules.

What this means is still unclear to many and once a decision is final, the Government will need to ensure that it provides practical and usable information to business. It seems that the EU is suffering from a fit of pique over the UK decision to leave the Union although for the past twenty plus years, it has been a one foot in and one foot out member due to its refusal to be part of monetary union.

Brussels’ refusals to acknowledge any special relationship between the two, due, if nothing else, to proximity and a shared history makes that stance hard to understand. Brexit can still go one of two ways; either, given the coming recession, it will be the perfect time to weather the issues that Brexit will throw up or it will contribute even further to the slowdown and the UK will take longer to recover will fall behind its trading partners in several key areas of its economy.

The other issue for the end of the month will be the decision, still to be made, about the significant step of reopening leisure and hospitality sectors of the economy. In practical terms this remains a massive undertaking and clearly increases the risk of a second spike

Yesterday, the pound rose versus the greenback, reaching 1.2740, closing at 1.2734. The CBOT futures positions data showed a further extension of short positions as the market continues to bet that this rally is set to correct.

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Protests expected to be short term drag

The May employment report, released on Friday, still overhangs market sentiment which, while growing in confidence towards the U.S. economy is leading towards a divestment of long dollar positions as global risk appetite grows in the wake of the reopening of several economies.

With second spikes a genuine possibility in two of the most successful nations in tackling the pandemic; South Korea and Germany and public gatherings, seen all over the world in the past week, demonstrating the Black Lives Matter cause, concerns that continue to grow.

The dollar’s fall seems to be slowing and there is significant support for the index around the 96.40 level as the charts begin to mirror price action from early March.

There is a school of thought that President Trump is content to see the protests on the front pages of the newspapers since it removes closer scrutiny of his Administration’s handling of Covid-19 which remains controversial.

There is also a developing feeling that Trump has been pulled out of a hole which he dug himself by the financial and economic sectors of his Government. Steve Mnuchin, the Treasury Secretary and Jerome Powell, the Fed Chairman have acted in complete sync in dealing with the practicalities of the pandemic from a financial perspective while the ability of the Federal Government to deal with the human aspects have been sadly lacking.

The Fed meeting which starts today is likely to focus upon the scaling back of the emergency funding that has been provided and concentrate more on the longer term support that is going to be needed despite the incredibly encouraging data from the employment report.

There is almost certain to be no change in monetary policy, but Chairman Powell will reiterate that the Fed stands ready to act in need.

The dollar index slowed its recent fall yesterday, closing at 96.69, just ten pips above its low.

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The recent progress of the euro has been in concert with that of the pound as both currencies have reacted to a weakening of the dollar.

Despite developing a kind of immunity to poor data being released by Brussels and/or Frankfurt, there is still a feeling from traders that the recent rally is a castle built on sand. Yesterday’s data for industrial production in Germany was taken in its stride by the market despite it being truly horrendous.

In April, production fell by 17.9% month on month and 25.3% year on year, down from 8.9% and 11.3% respectively in March.

This is a genuine reminder of just how awful Q2 figures are going to be across the board as the market already has the Eurozone pegged as the worst performing and most likely slowest to return to growth of the G7 nations

Elsewhere in the region, Spain announced yesterday that its economy will contract by 15.1% this year as the true economic cost is calculated. The newspapers also said the economy is unlikely to return to pre-crisis levels until late 2022.

For context, a one year fall of 15% will dwarf the 9% fall from the financial crisis which took place over six years.

Spain, hit hardest of all EU nations other than Italy, has been putting together a series of scenarios, but on every measure, it fares worse than the forecasts for the Eurozone as a whole. While this is hardly surprising given the havoc wrought by the pandemic, it illustrates the need for the emergency funding packages to be available sooner rather than later.

The euro rose to a high of 1.1319 yesterday as it appears to be running out of steam. It closed at 1.1294