More Economic Pain for Q1

Claire Dissaux at Millennium Global
Posted by Claire Dissaux at Millennium Global on Jan 21, 2021 10:46:32 AM

The Millennium Global Quarterly Outlook for the first quarter of 2021 shows a market still heavily influenced by the pandemic and Brexit while emerging markets are in good shape.

The latest insight for Q1 from Millennium Global is out now and shows fiscal policy still heavily influenced by COVID 19. Much has changed since the last report. Boris Johnson secured a last-minute trade deal; the Democrats took control of Congress and new variants emerged in Britain, South Africa and Brazil.

Previously, Millennium’s Capital Market Research team predicted policy to move from emergency measures to long term economic support. That will have been pushed back, with many countries battling a fresh surge in cases. This week, the UK passed 1,500 deaths per day for the first time.

Lockdown is likely to last for most of Q1 which points to a sluggish economic performance.

With control of the Senate under his belt, Joe Biden has a stronger hand policy wise than he might have expected. It reduces the chances of any Republican resistance against a strong stimulus package. This may further dampen prospects for the dollar.

The ECB, which is shortly due to meet, is set to maintain its current policy set having increased extended PEPP asset purchases and TLTROs for banks at the December meeting.

Continued fiscal support and monetary policy accommodation, combined with the further roll out of the vaccine, still point to a positive economic recovery in the second half of 2021. The virus is pushing back the timescale of the recovery.

However, China offers a different picture. Strict virus control measures and emergency relief for business helped the economy to bounce back strongly. Growth of 2.3% was the slowest for four decades, but it was the only major economy to expand in 2020.

Meanwhile, Japan’s economy is likely to contract in Q1, reflecting another wave of infection. However, a relatively cheap valuation against the dollar leaves room for potential gains.

In the UK, the free trade agreement with Europe averted the disaster of no deal. Our previous outlook came at a time when markets were still expecting a deal, but it was a close-run thing. Even with a deal in place, the UK still faces non-tariff friction with the EU and financial services have lost their passporting rights.

The pickup for GBP which occurred after the announcement of the deal is therefore likely to be short term. The wider outlook feels much weaker for GBP as the dual pressures of Brexit and Coronavirus bite. The UK ended 2020 with the deepest recession of any developed economy and is set for a softer patch in Q1.

After spending much of the year pricing in what it thought was going to happen with Brexit, the markets will have to deal with the reality in 2021. Meanwhile, the new variant, has effectively pushed back many of the predictions from our last outlook. As much of the world battles with a fresh spike, policy makers are still scrambling to keep the economy on track. The much-anticipated recovery will depend on how soon the vaccine is rolled out and how quickly restrictions can be eased.

Once again volatility is likely to continue in the short term. In such an environment, success will still be possible but it will need expertise, an understanding of the market, and pricing which provides best value for transactions. To discuss how MillTechFX can support your needs, arrange a call with one of our team members, or please contact us here.


URN: MT100042

Photo by Victor He on Unsplash

Topics: Currency reports, FX Research, Brexit, Volatility, Performance

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