Chamber Market Commentary – UK economy changing drastically

Member News

GBP – Great British Pound
Services sector moving online to hit many ancillary firms
The UK economy will emerge from the Coronavirus Pandemic looks very different to how it looked pre-lockdown.

Historically, it often takes a major event to allow significant changes to take place. Brexit has become lost in the whole upheaval that the Pandemic has brought and going forward the Government will need to resurrect its plans for a more global approach to trade.

The UK’s relationship with the U.S. is currently strained over the decision made yesterday by President Biden not to extend the time limit for the final removal of troops from Afghanistan. It means that there is potential for foreign nationals to become stranded when the borders slam shut, and the Taliban begins to take complete control.

There is potential for the U.S. to delay talks over a trade deal, which is clearly more important to London than it is to Washington.

However, the biggest change that will be brought to the economy post-Pandemic will be the change in working practices, especially in the services sector.

Working from home, whatever form it takes, whether total, or in some hybrid form, is going to completely revolutionize how town centres look.

The retail sector has already taken a massive hit, with several well-known brands no longer delivering a bricks and mortar model. Should the daily influx of workers be significantly reduced, the knock-on effect for a massive cohort of ancillary services will be devastating. There is a growing crisis within the logistics sector, with the country estimated to be short of up to 100k HGV drivers. The issue has been exacerbated by the departure of numerous foreign workers following Brexit and low wages in the sector.

The trade’s union which represents drivers believes that until the retail sector accepts that there is a cost involved in delivering goods across the country and beyond that the problem can only get worse.

The pound traded in a narrow range yesterday. The final week of August is often one of the slowest weeks of the year within the financial markets. Next week is Next week is likely to see activity pick up with a significant amount of data due for release, including the U.S. employment report for August.

Sterling traded between 1.3747 and 1.3693, closing at 1.3728.

USD – United States Dollar
Everything looks rosy, until it isn’t
Fed chairman Jerome Powell will make the keynote speech to the Jackson Hole Symposium at 3pm UK time on Friday. It is unlikely that his words will have sufficient weight to take the market out of its summer lull before the weekend.

Monday could see an increase in volatility if Powell provides anything resembling a timetable for the withdrawal of monetary support for the economy.

Between now and the next FOMC meeting on September 21/22 there is expected to be several comments from members that clarify the Bank’s position.

That will be in carefully coordinated preparation for an announcement of the commencement of the withdrawal of support, possibly as early as October.

Some bank’s analysts have moved their view back a month following the most recent economic data, and a lot will rest on the employment data due for release next week.

Powell spoke recently of the Fed putting away its emergency tools. That was interpreted as meaning that the tapper of asset purchases is about to begin.

This will be a crucial decision when it comes to timing and may well be the defining moment for Powell’s Chairmanship, whether he is renewed in the position or not.

There is very little margin for error in the timing of the withdrawal of support, although it should have no bearing on when interest rates begin to rise.

The Fed will want to give the economy a significant period of adjustment to allow it to operate without additional support. That will determine when the first interest rate hike will take place, and the path of inflation will remain critical.

There has been a tendency for good economic news to be emphasized, while bad news or poor data has been somewhat glossed over in recent months. That adds to the FOMC’s dilemma, as it needs to be able to have a clear idea of how the underlying economy is performing.

The dollar index took a breather from its recent activity yesterday. It bounced off support at 92.80 and closed at 92.88.

EUR – Euro
Berlin stands above the entire Union, except in output
Germany is in danger of being side-lined from the mainstream Eurozone economy as it continues to produce data, either positive or negative, that proves to be outside the range of its neighbours’ results.

The Bundesbank no longer has its customary degree of control over monetary policy, despite its determination in the early days of the Eurozone to ensure that the ECB complies with a model that was designed in Frankfurt.

While Mario Draghi did for the Eurozone what he is now attempting to do for his home country, he was limited by being a bureaucrat who preferred to operate outside the limelight.

That is the arena in which Christine Lagarde is most comfortable. She uses different tactics to arrive at a similar result as Draghi was trying to achieve.

The origin of the divergence of the ECB and Bundesbank can be traced back to the decision by Angela Merkel to support her friend and long-time colleague Ursula von der Leyen as EU Commission President.

Realizing that it was probably asking too much for Germans to be at the head of both the Commission and Central bank, she withdrew her support for the Bundesbank President’s candidacy. This, possibly unwittingly, set the ECB on a path towards both inclusivity and a change of emphasis from inflation fighting to economic support and recovery for all.

The recovery from the Pandemic has given Christine Lagarde the opportunity to make her mark on the region’s monetary policy and allowed her to allow things to move at a slower pace. Her victory in getting a change in inflation policy was something of a coup and will eventually be seen as a great achievement. Although, that, of course, depends to a large degree upon its success.

The euro was also caught up in a degree of torpor yesterday. It rose to a high of 1.1765, closing at 1.1754.

For more information and advice on mitigating risk that affect currency/market schedule a call with Christopher Smith.