Daily Brief

Forlorn hopes and cautious optimism

Unemployment figures add risk to sterling

Sterling had just about managed to pick itself up off the floor by close of business yesterday following disappointing inflation figures, but a gloomy start to Thursday highlights how vulnerable the pound is at the moment. News that the number of workers on UK payrolls has fallen by 649,000 between March and June, bringing the total number of people claiming work related benefits to 2.6m was bad news for the pound. The results were accompanied by the forecast from economists that the worst may be yet to come, in October when the furlough scheme ends. This has led to an increased focus on total weekly hours worked, which according to the Office of National Statistics (ONS) has fallen by 16.7%, which amounts to a record drop of 175.3m hours.

There appears to be little on the horizon to assist the struggling pound; a further recovery in global stocks appears to be a forlorn hope at the moment, as does the possibility that the European Central Bank (ECB) and European Council (EC) may disappoint investors with their recovery plan, putting the euro in check. Progress in the Brexit negotiations may be a cause for optimism, but it seems at the moment that investors aren’t holding their breath.


All eyes on the ECB and European Council

The euro faltered slightly this morning, losing a fraction of its recent gains reaching a four-month high against the US dollar as investors wait to hear from the ECB regarding future policy decisions. Many believe that the ECB may not need to be too aggressive against a backdrop of the planned stimulus for economic recovery across the continent. The result of the meeting of EU leaders is not guaranteed; there is some debate over whether the planned recovery fund will be approved in Brussels on Friday. While some countries are in favour, including some of the hardest hit countries including France and Spain, others – the Netherlands, Austria, Denmark and Sweden, dubbed “the frugal four” – are asking for a second look and demanding what they consider responsible levels of lending.

While investors look to the EU with some optimism that a deal is imminent – if not this weekend following the EC meeting then in the coming weeks – they appear to have lost all confidence in the US dollar. A slower economic recovery trajectory compared with Europe appears to be one factor and as cases of coronavirus continue to rise in the US, it appears that many are losing confidence in the leadership and support for Donald Trump is waning. The President currently trails his Democratic rival Joe Biden by 20 points, largely due to his handling of the pandemic, and while the stock market holds out hope of a V-shaped recovery, most economics are predicting a longer trough before the US can stage a recovery.


Mixed pictures and slow recoveries

A rise in global equities appeared to give some assistance to the embattled Canadian dollar yesterday, but in the end it could only break even after the Bank of Canada (BoC) struck a downbeat note in its latest statement and put a dampener on things. As well as keeping the interest rate steady, as expected, BoC Governor Tiff Macklem suggested economic activity was unlikely to return to pre-pandemic levels until 2022 and that an extended period of low interest rates was on the cards. However, it wasn’t all bad news from the BoC – suggestions of a possible “sharp recovery” in the second half of the year, following Q2 trends, did give the Loonie a brief boost but the overall message was one of a long, slow recovery for Canada and that didn’t help the currency much overall.

The Australian and New Zealand dollars both struggled to hold on to their brief rallies as the commodity-based currencies found themselves near the bottom of the pack once again. The data are providing a mixed picture – figures from China as well as domestic numbers on jobs and unemployment from Australia and lower inflation in New Zealand meant that it was difficult to get a clear picture down under. The overall sense was that the recovery was still in the early stages and too close to call, and as a result investors lost confidence.

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