GBP Reaction To New UK Govt Restrictions & How It May Impact The Economy

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. Okay, very good morning to everyone. It's Wednesday, 23rd of September. Hope you're doing well. Uh, going straight into things this morning and certainly going to have a look at the FX market Already seen a bit of continuation of dollar strength, but also latest catalyst being some renewed weakness in sterling currency on the back of course renewed restrictions being announced by the UK government yesterday, ratified by Boris Johnson in his House of Commons and speech on national TV last night. So let's delve straight into the charts and what we're looking at. And as you can see here, cable having a bit of a breakdown this morning. I've just marked up a couple of charts here to share with you guys. So, and we've seen some volatility in yesterday's session, right in the morning we saw quite a recovery. There were some Bailey comments where people obviously were looking for more details on negative rates, and, and not seeing that materialize caused a bit of whipsaw price action on the upside. But then ultimately, as the Commons speech materialized, we saw everything that was conveyed in the national press coming to fruition. We the announcements of more stringent measures being put in place in order to control the exponential growth that we're seeing now with the alert level 4 status of COVID-19 in the UK. So the pound coming under some pressure, uh, we retested that same point of the initial volatility low we had in the European open yesterday into the European close yesterday afternoon, retested that again in the Asia-Pacific session, and then we've seen a bit of a breakout to the downside this morning We've just dropped momentarily through the 127 handle, so decent 40-pip move there. Seemingly a catalyst of sorts was the UK Foreign Minister Dominic Raab came out saying that cannot rule out a full second lockdown. I wouldn't say that was the reason, I would say it's a catalyst. Fundamentally, on the coattails of what happened yesterday, all the, all the logs were on the burner, if you like. It just needed a match to light the fire, and I think that was the Rab comment. And obviously Rab has been a person who's been very vocal and adamant about people going back to work. And that's one of the main things in which the government has now reversed, of course, from yesterday's announcement. So I guess a little bit symbolic coming from that particular person. On a slightly longer-dated chart, this is looking at the bigger picture of near-term price activity for sterling, because I do think that there is potential some room for further downside here. First of all, we've got to tackle the 1.2681, looking at sterling futures here, which is the S1. But any move beyond that point, then technically support doesn't come in until we start getting down to around that July 23rd low. And that also starts to bring in some of the resistance areas that we were seeing at the beginning of July, and then also around the previous response to that level on the 200 DMA, which has acted as a good cap to some of the upside movement that we've seen on the intraday today. That was of course a really important level to look out for, which has caused a market reversal back on 11th of September. So now we're below there, definitely a bearish setup from a technical point of view, and fundamentally as well, plenty to go at into expectations of further sterling weakness about the implications these latest announcements could have. And certainly a full lockdown, certainly would have on the UK economic recovery. So a couple things then to, to also throw into the mix is continuation of dollar weakness. So obviously sterling weakening is going to benefit to a certain degree dollar strength, and certainly on that cable break it's managed to see the Dixie just get above the overnight highs. The dollar index is trading up about a quarter of 1% at the moment. And from a technical perspective, people are looking at the dollar breaking out of a downward trend line that's been respected since the overall beginning of COVID We obviously saw on the initial commencement of the panic in the market sell-off a very strong flight to quality bid into the greenback during the, the kind of devastating stock rout that we're seeing globally at the time when it was being priced in initially. But then after that point, then the, the kind of extreme accommodative measures adopted by the Federal Reserve saw persistent dollar weakness. And we've just broken out now in the last day or so of that, that descending kind of trend line, and we're up to retesting now around the 50-day moving average. So quite a key area here to have a look at. This would certainly be a signal that would further add to the belief then that they could see some downside pressure materializing on cable. Um, let's have a look then at Sterling in a bit more detail. We're talking about, uh, obviously what happened yesterday. Uh, the biggest blow is likely for sure to be felt, of course, by the hospitality industry, which is being forced to close early from 10 PM each night from Thursday this week, now suffers from the government's new instruction as well to office workers to work from home, and those new restrictions could potentially last up to 6 months is what the public is being prepared for by the government. So of course it's this idea of— and you know, it's quite interesting watching the news last night, they were actually filming in a pub just down the road from me in Southeast London, and they were talking about— it sounds like, okay, so what, they're going to shut an hour or two earlier, but But this guy was saying, well, not only are they under pressure financially as a small independent pub, let's say, that they now have to actually bring in extra staff on a security basis because trying to actually enforce people to leave at a certain time, as you can imagine, comes with some complication. And he was saying that's adding— their costs are going up, but their demand is going down. And so they're already in a losing situation. Irrespective of before some of these announcements were already being made, and it's only going to be accelerated by this. But also people not going to work, you know, we saw job losses in those types of related areas where, you know, a lot of these businesses are contingent, certainly in the city where Amplify is based, on the traffic of people going to work and then purchasing goods, food during lunch breaks and so on. So that not happening is certainly going to heap more pressure on the hospitality sector And so everyone is now looking to, to obviously Rishi, who was such an important character, of course, when he initially unveiled a number of significant policies on the initial onset of the pandemic. But growing calls are coming his way now to announce a new package of support for the hardest-hit sectors when he delivers his autumn budget later this year. The push, of course, is for a much more targeted extension of the furlough scheme. The FT has reported that Sunak's colleagues have said a range of support measures were on the table. No decision has been taken as yet, but several people briefed on the issue stated that work was underway on a number of options to subsidize workers' wages. Now, an interesting thing that the FT was talking about is a, a template that's been proposed by the CBI, who've outlined a new scheme and that they're saying that's to be in place from November 1st, which would be available to all companies and last a period of a year. It would involve a state subsidy if an employer was able to offer workers at least 50% of their normal hours. The attraction here for, for Sunak, the Chancellor, of a CBI-style scheme is it would be able to keep people in the workplace, support jobs that were still viable because remember he's had this, um, and, and probably a correct assessment of the idea of jobs being in somewhat suspended animation, of they're only being kept employed because of the furlough who would otherwise be let go. And that's not a healthy thing, obviously, from a cost perspective, or for just delaying the inevitable, which is that the unemployment rate will go up at some point. So again, the attraction for Sunak here for the, for this CBI-style scheme is it can keep people in the workplace, support jobs which are still viable, if only on a part-time basis. And so that could be something to, to look out for, and I think something will have to materialize in this sense, particularly for the hospitality sector, something which has been our base expectation for some time anyhow. So the other thing is, let's have a look at the economy. And, and obviously following these latest restrictions that have been announced yesterday Quite interesting to see the series of graphics that the FT had put together. And we were already before yesterday seeing the surge in UK spending growth starting to tail off in September from this big resurgence that we saw through the summer. So this is a graph looking at the percentage increase in consumer spending, which had already started to initially peak and then has just softened slightly. The other things then, retail footfall picked up when shops reopened obviously in the middle of June, June 15th, but they still remain well down on their, their kind of normal levels. In case of the UK, still close to nearly 30% off normal levels. And this is something that, you know, this kind of referring of more high-touch, high-frequency data rather than in these more traditional macroeconomic measures are a better way of mapping people's mobility and also then getting a more real-time sense of where we're at in terms of then anticipating the economic recovery. So here, I guess the point I'm trying to say is we already were not fully recovered, and now this initial— this next phase is coming in. And, and my assessment of the situation at the moment is that this, this recent acceleration in COVID numbers in in terms of confirmed cases in the UK, net result in increase in hospitalizations and subsequently deaths. All of these numbers, I think, are gonna go sharply higher over the coming weeks. I think the government's kind of obviously caught between a rock and a hard place between dealing with a humanitarian crisis but also managing an economy which does have then secondary humanitarian consequence if people are left unemployed, and it increases then people's poverty levels and access to medical care and all these types of things. So it's kind of— they're both bad situations, but the, the economy functioning is a key component more medium-long term to facilitating then better quality of life for all. So obviously though, they've got to confront a virus which is at risk of initial death. So it's, it's a difficult situation, uh, it's one where I'd say on the balance here, the government's been very upfront with trying to prepare people for 6 more months of this and the potential for it to get worse with a second nationwide lockdown, a real prospect. And I think a lot of that potentially, and particularly with the announcement of kind of these sensational numbers of 50,000 potentially by mid-October, are being constructed in order to make people become more fearful and ultimately more compliant which in itself then becomes self-fulfilling to help to control the virus. So yeah, here at the moment, I think things are going to get, get worse, um, considerably so on this front. And certainly that is going to impede the economic built-in recovery. And so as a consequence, should then net result continue to be a significant headwind for sterling at the moment, and particularly if we start to see The dollar technically on a bit of a breakout at the moment, and if that continues to remain the case, then certainly compounding this is Brexit negotiations, which we're obviously coming to the crunch time right at the worst possible time where, you know, by my calculations, looking at previous kind of developments of COVID what we've seen in mainland Europe and in the previous first phase of the virus back in kind of March-April time that really these numbers are going to peak at around the point of when the soft Brexit deadline hits in the middle of October. So it's definitely going to be an interesting couple of weeks to come for, for not just the government but the sterling currency, of course. So footfall was already down, that's going to get significantly worse. Levels of socializing, eating out, and travel have already decreased in the latest week after increasing through the summer. And then footfall to restaurants, pubs, and takeaways has also been on a weakening trend since the beginning of the month. So this latest development goes into an already slightly reversing situation from what otherwise had been quite a positive catalyst for, for general perception of the economy's recovery going forward. So that's the sterling story. As I said, there's some key technical levels I think that definitely need to be watched. You can see we settled a little bit after that initial I think was more of a technical break with Rab comment being the catalyst rather than the actual reason in itself. You can see there's quite a cluster, there's a really important area of support around 126.5374 in the futures, and which is around this kind of, you know, horizontal area here. If I just draw a rectangle to make more sense of this, which is here, is the next key level of support. Any breach of that, whether it comes to the today or this week, then a push lower down through 126 toward 125 is certainly on the cards, which would then start bringing in those price areas that we're seeing back around the 20th, uh, 17th of July. Obviously then, given the— these types of moves, the euro has also trading negative this morning by around 20 pips. Got some really important data coming out on the calendar in a short while. It's the flash PMI numbers. And so let me just quickly jump over to here. You get the German number, of course, coming up at 8:30. You've got the French numbers at 8:15— excuse me, German 8:30, Eurozone 9 o'clock, UK 9:30. These all will be potentially market moving. These are always very significant in order to see generally the, the perception of confidence from these purchasing managers at this point in time. Euro, a little bit susceptible here to potential downside break. That S1's held in the futures so far during the Asia-Pacific session, had a brief flirt with it at the European Open but bounced. And so certainly be keeping an eye there. On the upside, obviously here you've got the near-term range being defined by the low point that was seen at the London FX yesterday. That was retested in the early Asia hours and also first thing this morning. So it's confined to a fairly tight range, and I would say that ultimately that's going to break one way or the other. And the PMIs could well be the major catalyst for that price movement in the euro coming up within the next hour or so. Otherwise, looking at the other charts, equities— well, US shares reversed earlier losses yesterday. And that did come after Jerome Powell said the economy has a long way to go before fully recovering and will require further support. And certainly that type of more dovish tone tends to be well received by markets, particularly in the equity space. However, there has been dollar strength, which would be somewhat counterintuitive to that. A lot of people have been looking at comments coming out of the Chicago Fed President Charles Evans yesterday. Um, just to recap, Charles Evans, who's due to become a voter on policy setting at the FOMC in 2021— so he is currently a non-voter— said yesterday the Fed still needed to discuss its new average inflation target, but that it could start raising rates before we start averaging 2%. And he said more quantitative easing may not provide another lift to the US economy. So quite, quite hawkish comments there. Um, there are some market commentators saying that these were taken out of context, he was referring to the overall framework and flexibility of AIT. But nonetheless, again, when we're at these technically important or sensitive levels like we were just discussing here with the dollar, then it's a comment like that can certainly bump things out. And if we get a technical break, we start to see price confirmation and we can get of an extension on moves. So the dollar certainly has, has been a bit lively on the upside in recent sessions. It seemingly continues to be the case, particularly if it's supported by— if we get weak eurozone PMIs, puts a bit of downside pressure fundamentally on the euro with already a negative narrative for sterling, then certainly that, that short-term dollar reprieve might, might continue. Um, in terms of the overnight session, if we go back and just have a quick look at some of the the equity markets. Um, you can see here equity index futures, the S&P is pretty flat, the NASDAQ's a slight negative, but the usual case yesterday did see some outperformance, was up nearly 2% comparative to just 1% gains in the S&P. Um, overnight in Asia it was a bit more of a mixed situation, failed to take full impetus from the rebound in some of its global peers. Region a little bit more tentative ahead of ongoing US-China tensions. Japan playing a bit of catch-up, just coming back from its market holiday, having been away for the last 2 sessions and generally trading negative following that extended weekend session. On the equity front, do be aware that, um, Tesla shares were down another 7% last night. So remember, they've had back-to-back quite significant losses, in excess now of a 10% loss in just 2 days. You might have seen then a lot of people, you know, he tweeted a little bit of pessimism the prior day about coming up for this Battery Day event. That event then was delivered as far as what it was unveiling. They laid out a roadmap to build a $25,000 car by 2023 and eventually 20 million cars a year, part of a highly anticipated presentation that mainly— that caused the disappointment— was short of any kind of spectacular fireworks or PR stunt, which I guess people have become used to. And the lack of that forthcoming then has meant that their shares dropped quite significantly post-market on that point of view. And also as well, these ambitions of producing a very low-cost vehicle to quite high volume is heavily dependent on multiple planned technological innovations, which is all well and good, promising, but fairly, fairly high bar to executing that type of plan, of course, when it's contingent on those types of things. With the equity front, obviously then the market still remains a little bit sensitive to Fed rhetoric. I talked about the dollar potential reaction to those comments coming out of Evans. One thing to be aware of is the speaker slate on that front is particularly busy when it comes to Fed speakers. So if there was any misinterpretation from the Fed's point of view of how the markets have perceived that comment in a more perhaps hawkish manner, then there's plenty of opportunity for the Fed to come out and realign markets' expectations. I wouldn't expect that to come from Fed's Powell. His testifying before the House is much more fixed in nature, but you've got people like Fed's Mester, who is a voter, speaking at 2 o'clock this afternoon. Fed's Evans himself comes out and speaks again on current economic conditions and monetary policy at 4 PM. So that would be the one I'd watch closely. Does he roll that back slightly? If so, you could see some reaction of dollar weakness if that were the case. Rosengren, Kashkari, Bostic, Quarles, they're all speaking today. So it's a really busy docket for Fed commentary, so do bear that in mind. Definitely, um, loaded into the US session rather than this morning in the UK European trading hours. A couple of other things then, just to round off. You have had the RBNZ, they held interest rates as they are overnight as expected at 0.25%. They kept their bond purchase program at $100 billion Kiwi dollars. They did refrain from jawboning the currency. There was a momentary blip up in the Kiwi before then the move was kind of faded. Their monetary policy committee did favor introducing a funding for lending program for banks before the end of this year. That was one thing that people were looking at. Also, the RBNZ said they're actively considering taking interest rates negative, and it said it could do so in combination with the term funding for banks. So perhaps then there was initial knee-jerk and it was faded on the back of those— that type of more considerate commentary. Um, with the Aussie as well, if you do look at the Antipodean currencies, that's also been a little bit weaker overnight. I'll just bring the Aussie here into shot. And looking at the Aussie futures, we've found a bit of resistance here as Europe's come in after falling overnight on the breakthrough technically of what was yesterday's afternoon's low. So a little bit heavy there during the beginning of the Asian session. As I said, we've had a bit of a cap now at the S1. So Aussie's down about 38. It was interesting looking at the, you know, there was this long-term trendline break which was significant for the squeeze up that we had up to 74 through the back end of August, but we're now back below that same trendline area. So we're quite interested to see how we play out here on the downside if we do continue to move lower than an area of support I'd be looking at for— from here, this is looking on the weekly charts— would be we've got to get down to around 0.7060 type area. So it does open up the prospects of potentially directionally some more, more weakness to come in Aussie. This— why is the Aussie weakening? Well, a couple things, I guess. More top level, the ongoing apprehension regarding US-China trade talks at the moment, but more Specifically, dollars in Australia slipping overnight, yields also decreasing following increasing calls for the RBA to cut rates at next month's meeting. Some of the RBA watchers are now insinuating towards potential more action in the immediate future. RBA Deputy Governor Debelle spoke yesterday and recently outlined these various different policy options, and some of which then would be into expectative of more, more policy loosening. The other thing then, oil markets. We had the regular release, of course, of the API inventories last night. We did actually see a surprise build of just shy of 700,000. Expectations were for a draw of 4 million. Oil has drifted a little bit south overnight. It's down 39 cents in the futures in the front month contract at $39.41. Ultimately, though, I don't think it was too much of a big deal. Deal here. Oil still well within its kind of near-term range. Um, the S1, a little bit of area of support near-term to price activity until we probably get the DOE's later on. You've got the S1 does coincide with around the low point that we saw yesterday. You can see that was also that previous though we had back on the 16th before the move higher. So really, I guess you've got to wait for the, the inventory numbers from the, from the DOE later to see whether or not if we break down through that level, we'll look re-target down towards the low that was seen on the afternoon of the 21st. One thing bearing in mind that's probably offset a little bit of that downward bias on the bearish data on the crude figure— gasoline was a sizable draw, and I mean sizable, 7.735 million. Analysts were looking for a draw of around 2. That is the biggest drawdown in gasoline figures since September 2017, in fact. All right, quick look then to finish the overview of the day ahead. Yeah, these, these PMIs coming out are super important, so keep an eye out for that. You would anticipate to see a reaction in the euro currency for sure. And as I said, we're restricted in a fairly tight range at the moment, so a breakout either way is probably most likely. Then you've got the UK-related figures as well, which, you know, these are the September preliminary numbers. They're going to not capture some of the latest announcements that we've had, um, yesterday. But as you already saw from some of that more high-frequency data, that some of the recent indications would perceive then that general confidence was deteriorating already, uh, during the period of the last week or so. So we'll be interested to see if we— if you get a downside, obviously, surprise in, in the UK figures, then that's obviously just going to feed further and fuel the flames of this general negative bias at the moment. Otherwise, into the US session, Fed's Powell testifies to the House panel on COVID-19, so in front of the House today. But again, we've kind of— we've heard what we need to hear from Powell. This is more kind of repetition for different political sets at the moment. But Fed's Evans, Rosengren, Mester, as I said, a lot of Fed speakers to keep an eye out for. And then you get the US market services manufacturing PMI at 2:45. That's on today. All right, gonna leave it at that. I'm gonna wish you guys a good day ahead. If you've got this far for watching, thanks very much. Don't forget to subscribe to the channel and drop a comment if there's anything I can do, any questions that you have, I can help, I'd be happy to. All right guys, have a good session ahead and I'll speak to you tomorrow.