Currency Note

Policy signals dominate the week

By Christopher Nye August 24th, 2020

There’s a week of politics and policymakers ahead of us, with important signals as to the future of monetary policy at the Jackson Hole symposium, the “return to normality” from Covid, Trump’s potential second term and of course, Brexit.

Last week ended with a small reversal for sterling, based on disappointing news on the lack of a Brexit breakthrough. No further talks are due until 7 September. There is some suspicion that the government is relaxed about a no-deal, although the Irish premier said last week that Boris Johnson does have a “genuine desire” for a deal. Since no serious progress is likely until the politicians get together in October that will be hard to judge.

Following last week’s positive news on retail sales and consumer confidence, analysts will be looking for further signs of a V-shaped recovery, although with little data this is more likely to come from business results.

Politically, we have concerted attempts to get schools back in the UK next week, and the knock-on effect this could have in getting office workers back, where the UK lags well behind other major economies.

On Thursday, President Trump will be looking to pull a rabbit out of the hat at the Republican National Convention, to reverse his current poor poll ratings.

There is also likely to be increased interest in potential medical responses to Covid, as vaccine testing continues. We’ll be looking to see national Covid rates, as Portugal’s air bridge to the UK was restored and airlines saw an immediate boom in flights. Virgin Atlantic is looking for refinancing from creditors tomorrow, and Rolls Royce will announce potentially difficult results on Thursday.

As we approach just four months until the end of the transition period, the need to get residency in EU countries in time may begin to trump fears over quarantine and see a movement of Britons to Spain and France.

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GBP: Pound starts weaker, but could be a bumpy week

It could be a volatile week for sterling. After the excitement of Friday, the pound starts the week around 0.5% lower today than early Friday. Sterling had been enjoying a positive week for economic data, but this was scuppered by a disappointing update from the Brexit trade talks.

Ahead of us we have a relatively quiet week for data releases in the UK, so the week will be dominated by speeches and politics. However, tomorrow we do have CBI Distributive Trades Survey, an indicator of short-term retail prospects.

On Wednesday there will be a speech by Andy Haldane, chief economist at the Bank of England. Haldane was once named by Time magazine as one of the 100 most influential people in the world.

So what else could move sterling? Further falls in the power of the dollar are possible. There could be movement following speeches at the Jackson Hole Economic Policy Symposium on Thursday, both from Federal Reserve Chair Jerome Powell and Bank of England governor Andrew Bailey. Traders will be looking for signs of future monetary policy.

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EUR: Covid second wave continues to threaten

The second coronavirus wave is continuing to sweep across Europe as youngsters in particular drop social distancing in the tourist resorts. In Italy, the government says that nightlife could be stopped at 6pm, while German chancellor Angela Merkel has warned of more lockdowns.

Against USD, the single currency may continue the small correction from two-year highs that started last week with disappointing PMI data from France and the Eurozone.

There is little data this week, but we have German GDP tomorrow, plus two measures of business confidence from Ifo and GfK on Tuesday and Friday respectively. We will also see consumer confidence and unemployment in France on Wednesday.

USD: Jackson Hole dominates

The dollar could come under threat midweek with the (virtual) Jackson Hole symposium of senior policymakers. What can US policymakers do about arresting the dollar’s structural weakness?

Tuesday is the big day for data in the US, with house prices, new home sales and consumer confidence.

On Wednesday we have durable goods orders, quarterly GDP on Thursday and personal income and spending on Friday.

On Thursday, as well as Jackson Hole we have Donald Trump’s speech to the RNC. Will he be able to get momentum behind his re-election campaign?

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