Morning Brief – Lockdown 3.0

Lockdown 3.0

The UK Pound yesterday succumbed to selling pressure with prices at the 1.37 mark versus the US Dollar rejected. Despite the positive backdrop to the first full trading session of 2021, largely created by the EU free trade agreement late last year, Sterling was hampered by concerns over spiralling cases of the coronavirus. The UK’s current experience of the global pandemic was assessed to be so dire such that strict social measures were thought to be inevitable with considerable economic spill-overs in tow. Bracing for the address that the Prime Minister delivered from Downing Street last night, GBP lost 1.6 cents versus the Dollar peak to trough in yesterday’s trading session. The ultimate verdict by the PM has not yet been met with further GBP selling as the announcement sat in line with market expectations.

With a whisker shy of 0.1% of the UK population being infected with the virus every single day and an R rate still above 1, the lockdown announced by the prime minister yesterday was severe. Resembling the March ‘20 lockdown closely, the slogan returned to stay at home, protect the NHS and save lives – a message not seen since the first weeks of the pandemic. Such a severe lockdown is guaranteed to have a negative economic impact and the PM, as far as England is concerned, did not put an end date on the lockdown measures. Commitments to vaccinate the most vulnerable quintile of our population by mid-Feb if we have ‘wind in our sails’ has given the market expectations of a long and protracted lockdown with Q1 GDP growth marked down once again.

The wider market had begun a relatively sanguine trading day yesterday ahead of the upset in the Pound. A weaker Dollar and stronger Euro initially paved the way for solid risk conditions as markets stretched their legs following the festive period. In the US today the runoff elections in Georgia will determine the composition of the Senate as Biden begins his Presidency later this month. Today’s election result in the state of Georgia is therefore critical to not only the Dollar but to valuations of currencies far beyond the borders of the United States. If Democratic candidates Jon Ossoff and Raphael Warnock both win the ballot then the Senate will be divided 50-50. The Senate is critical to any President’s ability to enact law and make progress and the rules state that within a tied senate, the tie-breaking vote is cast by the Vice President – in this case elected to be Biden’s own running mate, Kamala Harris.

Success for the democrats in the Senate votes today in Georgia will therefore determine the scope of Biden’s presidency. This result will identify whether he is able to enact those policies that we might expect him to pursue given more free will and scope, many of which are thought to be USD-negative. The impact of a weaker Dollar should itself cause trickle down effects in emerging markets, however, the international scope of Biden’s projected policy set will have a direct impact on the shape of global trade and international relations.

Discussion and Analysis by Charles Porter

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