Jul 21

“So much stimulus, so little time….”

July 2020.

Concerns continue to grow at the slow pace of the UK’s post lock down economic recovery. Not only is there limited sign of the expected ‘V’ shape recovery but, crucially, the recovery lags behind it’s peers and this is increasingly reflected in the exchange rate.

We know the UK has a greater exposure to the service sector (Some 80% of the economy) than others but in the superficial world of the currency markets that detail, and the point that the UK entered and exited lockdown behind its peers, will likely lie forgotten / ignored.  The nagging concern is that, despite all the stimulus from the Government and the Bank of England, the life blood of the economy i.e. consumers will remain cautious about their spending habits until they have greater confidence of employment. 

Yes May’s unemployment data for the UK was better than expected at 3.9% but with Furloughed workers still counting as employed many still see significant risk of a sharp rise in this number. We will therefore see more focus than usual on this Fridays Retail sales numbers as an indicator of consumer spending, with July’s PMI releases also an important reader of consumer and business confidence. 

Whilst many feel its too early to judge the true impact of the stimulus in the economy, a speedy recovery is important not only from an exchange rate perspective, but also from the need to regain a stronger economy in the event of a no trade deal Brexit, and on that the clock is most definitely ticking… to borrow a favoured Brexit phrase.   

If all this sounds overly pessimistic (and I remain generally optimistic for the UK both in terms of a quick recovery and a reasonable Brexit outcome) then you can look to the Bank of England Chief Economist, Andy Haldane, for comfort. Haldane raised concerns that with all the additional stimulus inflation will rise alongside growth and exceed the governments target. Whilst thus far this is not the majority view on the MPC it does highlight the risk of the Governments strategy to support the economy and protect jobs. 

With the cloudy nature of the UK’s employment statistics at the moment it may be that the inflation print is a more useful measure of the economies performance and the higher than expected print in CPI last week will be a factor for the Bank as it considers further monetary easing. It was certainly positive in calming deflationary fears but it’s a very fine line for the Bank and government to tread.  

Bringing all this back to the exchange rate, Sterling remains 2020’s worst performing major currency and with further downward pressure from a slower economic recovery expected, it will look for support from better than expected UK data, continued “significant differences” among the EU27 as they enter the 4th day of talks on the EU economic recovery package and the real covid-19 induced problems in the US

Key Opening levels for the majors this week:
GBPEUR – 1.0990
GBPUSD – 1.2560
EURUSD – 1.1410

Bell Rock Financial Limited is an Independent Consultancy specialising in Financial Risk Management.

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