The pound moved higher against the euro and the US dollar yesterday making reasonable gains with more volatility expected as the markets try to determine the overall impact of Covid-19 on the British economy.

As the furlough scheme comes to an end, there are a growing number of firms restructuring and cutting jobs. Marks & Spencer yesterday announced 7,000 job losses. Other well-known retail brands including Boots, John Lewis and WH Smith have also announced job losses. It is relevant for the price of sterling as those job losses impact on the overall economic recovery following Covid-19. The Bank of England may be optimistic for a pickup in consumer spending, but it fears a doubling of unemployment which it expects will peak at around 7.5% by the end of this year amounting to approximately 2.6 million people.

British Chambers of Commerce head of economics Suren Thiru said “While the headline data continues to lag behind the reality on the ground, the decline in the number of employees on payrolls and hours worked is further evidence of the damage being done to the UK labour market by the coronavirus pandemic.

Yael Selfin, chief economist at KPMG has said “As the job retention scheme unwinds, we expect unemployment to rise quickly in the fourth quarter.”

Brexit Deal Progress Yet to be Officially Announced

UK-EU Trade Negotiations

Meanwhile UK EU Brexit trade negotiations re-commenced yesterday for the seventh round and are set to continue to be one of the biggest drivers for sterling exchange rates. The contentious issues of the competition rules, fisheries policy and state aid continue to be the stumbling blocks for reaching an agreement. The UK’s chief negotiator David Frost has however been more upbeat about a deal being reached despite acknowledging that there are still “considerable gaps” between the two sides. To put things into perspective Michel Barnier said at the last round of negotiations that the UK had not shown a willingness to break the deadlock but added that an agreement would need to be reached in October at the latest to allow sufficient time for it to be ratified before the transition period finishes. A Downing Street spokesman said earlier this week “Our assessment is that a deal can still be reached in September.”

Consumer Price index inflation data released this morning rose to 1% for the month of July and well above the expected 0.7% as oil prices pushed higher and businesses such as dental practices and physiotherapy included the cost of PPE. Inflation is still well below the 2% threshold set by the Bank of England and is unlikely to shift policy at the central bank.

Eurozone Employment Data Shows Sharpes Decline Since 1995

The outlook for the euro is also uncertain after the EU reported weak employment data last week with the number of people in employment falling by 5.5 million. Eurostat which compiles the figures said they represented “the sharpest declines observed since the time series started in 1995.” The weak data follows EU Gross Domestic Product figures which showed the EU officially entered recession in the second quarter after posting negative growth of -12.1%. Germany, France, Spain and Italy all reported contractions of over 10%. However there have been some green shoots appearing in the EU economy of late which could help support the euro going forward. EU exports increased by almost a third from May to June whilst Purchasing Managers Index data for the manufacturing sector also rebounded strongly. Data is light with EU Consumer Price Index numbers released this morning. New Purchasing Managers Index data for both the manufacturing and services sectors will be released on Friday which could make for an interesting end to the week for euro exchange rates.

US Election and Economic Data

US housing starts released yesterday showed the housing sector is continuing to rebound strongly. Housing starts increased by 22.6% in July rising for the third straight month and better than expected. It is one of the few sectors that is performing well when others are still being hit by coronavirus. The data also revealed that applications to build, which is a good barometer for future construction, increased by the highest amount since 1990. Despite the strong data the dollar weakened against the pound by almost 1% yesterday.

The US election Tuesday 3rd November approaches with 2 ½ months left for both candidates to win votes which will likely bring further volatility for the US dollar. Joe Biden has generally been ahead in the polls for much of 2020 although as history has demonstrated, the final result will depend on the winning of key states.

As Irwin Stelzer from the Sunday Times writes “it will be difficult for Trump to win this election – but it is more than possible that Biden will lose it.

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