Can the pound maintain its rally despite the hit from lockdown?

Can the pound maintain its rally despite the hit from lockdown?

The pound, which has rallied this year despite a faltering UK economy and post-Brexit trade frictions with the EU, faces a double-threat on Wednesday with the release inflation and retail sales data for January.

Analysts said that while figures released on Friday revealed the UK had avoided a double-dip recession, caution was still needed. A disappointing performance in the services sector — which has been hit badly by a strict national lockdown — could stoke concerns that the Bank of England will be forced into offering further monetary policy accommodation.

The central bank has indicated that it does not expect to bring interest rates into negative territory from 0.1 per cent currently. However, it has asked commercial banks to prepare in case it needs to deploy such a measure to prop up the British economy.

Much of the optimism surrounding the pound, which has gained 1.2 per cent against the dollar this year, stems from the success of rolling out a coronavirus vaccine at a quicker pace than other major regions such as the EU. But the speed of an economic recovery will be key for the currency, say analysts.

“We will need to see an end to lockdowns and restrictions before growth begins its natural ascendancy,” said Charles Hepworth, investment director at GAM Investments. 

“As the impressive pace of vaccine rollout in the UK takes hold, it has to be the more likely outlook that growth will come roaring back,” Hepworth said, adding that such a resurgence was still one to two quarters away. Eva Szalay

How worried are Fed policymakers about inflation?

The Biden administration’s $1.9tn stimulus plan has sparked a spirited debate in recent weeks about the prospects of an inflationary jump this year.

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Lawrence Summers, former Treasury secretary, warned that a package of such magnitude could trigger “inflationary pressures of a kind we have not seen in a generation”. But former Federal Reserve chair Janet Yellen, who now runs the Treasury, largely dismissed such concerns, arguing that the biggest risk to the economy was not doing enough to help the unemployed.

Meanwhile, the Fed’s favourite inflation gauge, the “core” personal consumption expenditures index, languishes at 1.5 per cent, well below the central bank’s longstanding 2 per cent target.

On Wednesday, investors will be given a glimpse into how the members of the Federal Open Market Committee, which sets monetary policy at the US central bank, view the inflation outlook when the minutes from January’s Fed meeting are released.

Some Fed officials have already been vocal. At an event last week, chairman Jay Powell said any burst of inflationary pressures this year would likely be “neither large nor sustained”. Also last week, Richmond Fed president Thomas Barkin shrugged off inflation risks and even went so far as to warn about deflationary forces at play.

“How sustained inflation will be is likely going to be determined by the response of the labour market,” said James Knightley, chief international economist at ING. “If the economy sees rapid jobs growth and wages start to rise, this is when inflation can become a much bigger, ingrained issue.” Colby Smith

Line chart of core personal consumption expenditures price index (%)  showing Fed grapples with lacklustre inflation

Is the worst US oil crash since 2008 over?

On the cusp of $60 a barrel, US crude benchmark West Texas Intermediate is back above its historical average price, raising hopes that the battered commodity may on a long-term upward swing.

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A year ago, the contract experienced its worst market crash since the 2008 financial crisis, even trading below zero in April. Now a cyclical bull run may be under way, say analysts from Goldman Sachs.

The oil market’s fundamentals have turned. Last year’s Saudi-Russian price war, which sparked the collapse, has given way to months of deep supply cuts from the Opec+ cartel. US oil output has declined. Global demand, hit hard by the coronavirus pandemic over the past year, is on the rise, albeit gradually.

The US crude price has rallied more than 50 per cent since news of the vaccine breakthroughs broke in early November.

Meanwhile, operators’ colossal investment cuts raise the prospect they might be unable to meet consumers’ thirst for oil once economies have fully recovered.

“With vaccines being rolled out across the world, the likelihood of a fast-tightening market from [the second quarter] is rising as the rebound in demand stresses the ability of producers to restart production,” said Goldman Sachs in a recent note.

Still, at current prices many shale operators will be tempted to ratchet up drilling again. Likewise, Opec has much oil supply in reserve if its producers lose patience with cuts.

“What goes up can also come down,” said Bill Farren-Price, a director and Opec analyst at consultancy Enverus. “Saudi Arabia has already shown once in the past 12 months that it can floor oil markets.” Derek Brower



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