Moneycorp Update -7 July 2020

GBP
It was a hard old slog for sterling this week, eventually a seventh of a cent better off against the euro and a quarter of a cent higher against the US dollar. As the UK prepares for its own Independence Day, when pubs, restaurants, hotels and hairdressers can finally start reopening, the week also saw two important speeches. One should have helped the pound, but it didn’t, and the other ought not to have done, but it did. Off the back of those speeches on Tuesday, the pound was within an inch of being the day’s top performer, beaten only by the Canadian dollar.
The first speech was by Bank of England Chief Economist Andy Haldane, saying the country was on course for a V-shaped recovery. Coming sooner and faster than expected, it brings with is the risk of higher inflation. This optimism still came with a note of caution though, expressing that increasing unemployment as the government unwinds its furlough scheme could scupper the speedy economic recovery. Haldane’s speech was the sort of talk that would traditionally encourage buyers of currency, but they were conspicuously absent after his statement. Prime Minister Boris Johnson then took to the podium for his ‘Economy Speech’, and announcing £5 billion of capital infrastructure spending. Much of this plan is a rehash of last year’s election manifesto, but it inspired buyers of the pound, with sterling strengthening against the US dollar and the euro by an average of 0.3%.
It appeared sentiment was the main driver for sterling, as demonstrated above. Other points to note include the money supply figures from the Bank of England, revealing a third month of net debt repayments by households and a slump in mortgage approvals. Brexit negotiations continued to rumble on, with the focus on a landing zone that could form the basis of an agreement on trade.
EUR
A more unproductive week for the euro than the pound, it added an eight of a US cent and lost that much to sterling. Little difference, but again positive sentiment came in the form of removing a rather large and irritating thorn in the EU’s side. Towards the end of last week the European Central Bank carried out a charm offensive to disarm German critics of its quantitative easing activities. The Governing Council’s June meeting and Executive Board Member Isabel Schnabel’s speech both emphasised the proportionality of the ECB’s actions. Schnabel defended the bank’s monetary policy as “necessary, suitable and proportionate.” Evidently, it worked because the Bundestag passed a resolution, making the approval official.
Getting the ‘frugal four’ to agree to the terms has been a sticky issue in Europe since the pandemic took hold. At the beginning of May the German Constitutional Court had set itself against the ECB and the European Court of Justice by demanding that the bank justify its purchase of bonds and other assets. The meeting account stressed the relationship of the asset purchase programme to the low inflation rate, which the bank is obliged to raise over time from its current level of 0.1% to its target of “at or just below 2%”. The bank’s concern has always been the deep economic slowdown that has followed Covid-19. With Germany on board, its plans can move forward.
PMI manufacturing data ranged from growth (in France and Ireland), to continued shrinkage (in Germany). Unemployment in Germany edged up to 6.4%, while Europe overall saw it grow to 7.4%.