The pound is set for potential high volatility today with a series of important data releases and political developments.
The Bank of England meet at 12:00 where it is expected that it will inject further stimulus into the system as an additional response to the Coronavirus. The Central Bank is likely to announce a further £100 billion of quantitative easing (QE) and possibly more. George Buckley, economist at Nomura said: “While we think negative interest rates will be too much of a stretch, we do expect the bank to announce a larger-than-consensus £150 billion extension of the QE programme.”
The decision today follows the bleak economic data last week which saw the British economy crash 20.4% in April. By the end of April, the UK economy was 25% smaller than in February. UK inflation data released yesterday also fell to a near 4 year low falling to 0.5% in May. The weak data as to be expected during these unprecedented times suggests that inflation will remain below 1% for some time which should add further justification for the Bank of England to maintain loose monetary policy and increase quantitative easing today. Lloyds Bank are forecasting a unanimous vote by the MPC to increase QE by £100 billion with a slim chance of something larger.
The two-day European Council meeting starts today with Brexit high up on the discussion list. Any statements from either side could see significant volatility for sterling exchange rates. In a sign of how these discussions could remain locked for the foreseeable future the BBC reports that negotiators privately from both sides acknowledge that this summer is perhaps too early for compromises. In theory “the other” side could bank any given concessions and demand more in the Autumn as the deadline approaches.
Boris Johnson said earlier this week that there is a “very good chance” of agreeing a trade deal by December and hopes a deal can be “done in July” as trade talks intensify when new talks begin at the end of this month.
He added “I certainly don’t want to see it going on until the Autumn/Winter as I think in Brussels they would like. I don’t see any point in that so let’s get it done.”
Friday saw Cabinet Office Minister Michael Gove formally reject any transition extension. He has said that he has “formally confirmed” the decision during talks last week. The Financial Times reported at the weekend though that the EU will enforce full customs and regulatory checks immediately after the transition period ends and will not reciprocate with a light touch border with the UK. Whilst Boris Johnson wants to put a tiger in the tank the EU do not want to buy a pig in a poke.
The UK is still currently constrained by the 2-metre social distancing rule although it is currently under review. In France and the Netherlands, the required social distancing allowance is just 1 metre. This is also in line with the World Health Organisation’s guidance. With many UK businesses, particularly in the hospitality sector unable to re-open because of this rule then any change in this policy could change the economic outlook rapidly.
Germany yesterday urged other EU states to prepare for a no deal Brexit adding further uncertainty to this volatile situation. Reuters yesterday produced a document with some of the transcript reading “From September the negotiations enter a hot phase. Britain is already escalating threats in Brussels, wants to settle as much as possible in the shortest possible time and hopes to achieve last-minute success in the negotiations.” Lack of a deal could exacerbate the damage already caused by Coronavirus for both the UK and EU and their respective currencies.
EU car sales for May fell yesterday by 52% despite lockdown measures having been eased in Germany that month. EU inflation data also fell to 0.6% in May down from 0.7% the month prior. The European Central Bank will be monitoring this development closely as the EU has for many years battled with weak growth and low inflation.
Data is light for the EU today so focus will be on the EU summit to close the week and next weeks Purchasing Managers Index data on Tuesday.
The US dollar looks set for more volatility after US Fed chair Jerome Powell said that the US is starting to bounce back and is nearing the end of its lockdown phase. Although unemployment reached a staggering 13.3% earlier this month it was not as dire as many had expected. The better than expected data and recent optimism for retail sales suggest the bottom was reached in May. Nonetheless Jerome Powell said that employment and economic activity remain far below their pre-pandemic levels and significant uncertainty remains for the US economy. With a new spate of confirmed Covid-19 cases currently hitting the US across six states, his words could not be more true.
US President Donald Trump proposed a $1 trillion infrastructure initiative to help with the recovery. Such a bold move not only has direct impact on the performance of the economy and creating jobs but will likely have some influence on the US Presidential election, this November.
This afternoon sees US initial and continuing jobless claims which have proven to be something of a market mover for the dollar in recent times.
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