“Hello everyone, we did it”
In hindsight, the euro was probably on a hiding to nothing on Monday. If the European Council had rejected the Covid recovery package it would have been marked down. In the event, the deal went through as expected and profit-takers sent it lower anyway. The EUR shared last place with the JPY, down by an average of 0.3%.
Having burnt the midnight oil in Brussels the European Council eventually settled on an agreement closely in line with expectations. The announcement this morning wheeled out two important new acronyms - the Multiannual Financial Framework (MFF) and a specific recovery effort under Next Generation EU (NGEU) – as well as a total of €750 billion in post-Covid aid. €390 billion of the money will go out as grants, and the €360 billion balance will be offered as loans. There was also agreement on a €1.074 trillion budget for the next seven years, which could meet resistance from the European Parliament.
After two difficult months in the making, this morning’s deal will come as a relief to Europhiles and supporters of the single currency, despite the euro’s knee-jerk downward spike. The European project has taken a politically and philosophically important step forward with the decision to embark on its first ever jointly-funded programme.
A shot in the arm
News of another promising anti-Covid vaccine was positive for the pound. This one hails from Oxford and could be available within months. The government has ordered 100 million doses, hoping to vindicate the prime minister’s claim last week that it could all be over by Christmas.
It is not entirely clear why the domestic origin of the new vaccine should be so specifically helpful to sterling. There is not, after all, any suggestion of nationalistic profiteering if the treatment proves to be effective in blocking the virus. Nevertheless, the “Made in Britain” label was a big help to the pound throughout the day. It went from Friday’s zero to Monday’s hero with an average gain of 0.8%, taking a cent and a quarter each from the USD, the EUR and the CHF and making proportionally-similar progress against the JPY.
Although no cause-and-effect was evident from the pound’s movement on Monday afternoon, it did receive background support from the Bank of England’s chief economist when he visited Parliament’s Treasury Committee. Andy Haldane told MPs that “Roughly half of the roughly 25% fall in activity during March and April has been clawed back over the period since… We have seen a bounce back. So far, it has been a 'V'”.
Data this morning showed that “the government borrowed more in the first three months of this financial year than it did in any full year except two at the height of the financial crisis.” The reaction from investors was along the lines of “oh, is that all?”
The pound actually moved a little higher after the news, probably not because of the borrowing numbers but despite them. There are no other ecostats or high profile events on today’s agenda with any obvious potential to affect sterling.
There are scarcely any to affect other currencies either. Switzerland’s balance of trade usually goes unremarked. The Chicago Fed’s National Activity Index might influence the USD. Potentially the most important data will be Canadian retail sales for May. A 20% increase is expected to build on April’s 19.1% rebound.