Morning Brief – Double Digits

Double Digits

Hold onto your hats, there’s only 99 more days of 2020. For many, this year has been one they wish they could forget. For many of those, however, it will be the year they cannot. But will 2021 provide greener grass? Johnson’s admonition to the public that new Coronavirus measures could be in place for six months without a marked improvement in infection rates suggests perhaps the date rollover will not change our realities. As stocking fillers are downgraded from chocolates and socks to face masks, we will likely face a new year with the pandemic still an enduring reality.

Rising infection rates and further lockdown measures have weighed on Sterling sentiment this week. The Pound remains at one month lows versus the US Dollar and close to post-pandemic lows versus the Euro. As daily infection rates continue to gap higher, Chancellor Sunak will address the House of Commons today to deliver his Winter Economic Plan. With the furlough scheme set to end next month and employers finding limited incentive in Rishi’s cash bonuses for retained or new workers, it will be critical for the Pound that he presents a plan to heavily support the economy and labour market.

Rumours suggest that the Chancellor could introduce a furlough take 2, slimmer in coverage and closer aligned to European furlough models. Such models allow the government to top up workers’ pay for reduced hours worked. This should decrease the fiscal burden of the new scheme whilst allowing jobs that still have a place in today’s economy to be retained. The impact upon the unemployment rate and therefore UK Pound will depend on the generosity of the scheme, it’s implementation and the severity of the spread of the virus and reactive measures over the Winter. Mr Sunak will have his work cut out therefore to convince Sterling markets his Winter Economic Plan is enough to defend the economy.

Fundamentals on the monetary and Brexit fronts have been improving gradually this week. Speaking after the BoE’s monetary policy decision Governor Andrew Bailey put markets off the scent of negative rates slightly. Speaking on Tuesday his words encouraged a brief GBP rally when he upgraded Q3 economic forecasts and observed that last week’s monetary policy statement did not imply the Bank would use negative interest rates. Brexit negotiations too continue to show more significant improvements following the offer of concessions from both sides of negotiations. Technicals and momentum indicators are also beginning to suggest limited further downside for the Pound. Provided that the Winter Economic Plan spurs confidence in the UK economic outlook, GBP could be due a correction. However, a rate of infection above one and the consequent exponential growth in infections will itself continue to put pressure on the Pound limiting the scope of this correction. Lastly, with vaccine trials continuing to make progress, the probability of medical breakthrough continues to be underpriced in risk assets.

Discussion and Analysis by Charles Porter

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