GBP: Bank of England meeting fails to hold up sterling
EUR: Close to target on EURGBP
USD: Viral load only increasing
Yesterday saw the Bank of England hold rates at 0.1% and add £100bn to its quantitative easing program in a move that suggests it is still too early to tell how the UK economy is emerging from the harshest economic environment for 300 years but that the level of stimulus the Bank needs to offer the UK economy can be slowly tapered into the end of the year.
Risks remain of course in the form of Brexit uncertainty, the return of furloughed workers and a damaged demand dynamic leading to inflation at a quarter of target so we foresee that conversations around future expansions of asset purchases and negative interest rates will remain into the end of the year and possibly beyond.
This morning retail sales announcement showed that the main engine of UK economic growth, consumption, is sputtering back into life but remains significantly short of pre-Covid levels – down 13% compared to last year and a similar number compared to February, the most recent month that was not affected by the lockdown.
We can see that consumption has risen on three factors; access to more retailers, the need to treat oneself and likely boredom. How long these drivers can remain positive depends much more broadly on the jobs market moving forward with cliff-edges seen as the furlough scheme winds down and some consumers face claiming universal credit instead of their government supported wage.
The next three months of economic data is much more important than the last three months and will set in motion just how strong the UK’s recovery will be. Previous recoveries have largely been born on the backs of the British shopper – a species that can smell a 0% APR-for-3-years-deal at 100 paces. We must wait to see whether this recession has been enough to kill off those instincts or not.
Sterling has dipped lower in the past 24hrs on both these announcements as well as wider pulls lower in equity markets.
The euro is staying out of the fight at the moment but remains strong against the pound and barely a per cent away from our near-term target of 0.91 in EURGBP. There seems to be little reason why that can’t be achieved in the coming days.
Further increases in Covid-19 cases have set the USD up for a strong day as investors shelter from a new wave of risk. California, Texas, Florida and Arizona all announced grim records of a new cases or rises in cases over the past week yesterday. While it’s clear from some figures that the US economy is open, the lockdown has not worked to ‘flatten the curve’ in a lot of the Southern States in particular.
Similarly, the news that over a million new people claimed unemployment insurance in the States for the 13th week in a row further cast into doubt the optimism seen in the US payrolls announcement a fortnight ago.
The US data calendar is quiet today but movements in options and futures market expiries for the previous quarter this afternoon could add to some volatility.
The yen has joined the USD as one of the major performers this week, capitalising on the need for a haven from increased viral fears.
Have a great day, a wonderful weekend and please remember to take care.