Waiting and wondering was the story for sterling this week.
And although it took a distant fourth place behind the US dollar and Japanese yen, the pound was only narrowly beaten by the Canadian dollar and strengthened by an average of 0.7% overall. The UK government spent Monday softening up the population for tighter anti-Covid restrictions, before the PM addressed the nation on Tuesday. As the virus is threatening to flare up again, restrictions on hospitality opening times and working from home has once again been advised.
After waiting for Boris Johnson’s announcement, sterling was on standby for Chancellor Rishi Sunak’s statement on Thursday, where he revealed his plans to help the two and half million people on furlough and the unknown number whose jobs are at risk as a result of renewed Covid containment measures. The pound climbed against the euro and US dollar after the fresh job retention measures to replace the furlough scheme were announced. The Job Support Scheme will last six months and will encourage businesses to retain staff on reduced hours, with government support for the lost wages. This economic support from the government was widely anticipated, having already been priced in ahead of the speech. While investors may worry about the long term economic impact, the pound did enjoy some relief in a week where increased restrictions and growing concerns over the slowing of the UK’s economic recovery had created fears over a sharp spike in the unemployment rate.
Official economic data for the UK extended no further than retail sales this week, which increased by an on-forecast 0.8% in August after three months of strong gains. House prices remained strong, with Rightmove reporting a 0.2% rise in asking prices in September and a 5% annual increase. Input from the Bank of England and the Treasury was also positive on balance, with Governor Andrew Bailey playing down the idea of negative interest rates. With less than 100 days to until Brexit, eyes are starting to dart between Covid economic recovery and the ‘will they won’t they?’ potential trade deal between the UK and EU.
It wasn’t just the UK bringing in renewed Covid restrictions. France announced new measures during the week, as did Italy and Spain, but the euro is of course less sensitive than sterling to such national restrictions, because I is less susceptible to individual national stimulus measures. It did not flinch at the news, and is unchanged on the week against sterling.
There was not much help for the euro from the economic data, and the provisional purchasing managers’ index readings did not improve the mood. Of the 14 from Europe, only three – for French, German, and Eurozone came in ahead of forecast and higher on the month. Small improvements in German and Eurozone consumer confidence left both of them below zero, and the services sector measures for France, Germany and Euroland were below 50, indicating shrinkage.
Still, despite the UK on course to leave the EU at the end of the year, Bulgaria and Croatia are very much on track to join the single currency crew, with the European Central Bank’s Economic Bulletin confirming the two countries had taken the penultimate step towards participation in the euro by joining the exchange rate mechanism “ERM II”. Other than that there wasn’t anything new from the ECB, beyond a less-than-helpful observation by the bank’s president that, “the strength of the recovery remains very uncertain”.
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