Sterling fell more than 2 percent against the euro and US dollar last week and is now trading at 1.1180 and 1.2095 respectively. The fall was initiated by comments from the Bank of England (BoE) about future monetary policy as investors began pricing in further quantitative easing for June’s BoE meeting.
Sterling’s woes were further escalated as gloomy economic data showed a sharp fall in GDP for March, but with the UK not invoking lockdown until 23 March, the worse is yet to come. Markets had hoped for a “v-shaped” recovery but this prospect is now dwindling as economists predict it could be 2022 before the UK economy returns to pre Covid-19 levels.
However, the killer blow for the pound came on Friday when once again, EU Chief Brexit Negotiator Michel Barnier and UK Chief Brexit Negotiator David Frost confirmed no progress had been made. Both Barnier and Frost criticised each other and laid the lack of progress firmly at their opposite number’s feet, citing their unwillingness to compromise.
The UK-EU will engage again in early June and if no progress is made here then the UK and EU could find themselves moving towards World Trade Organisation terms come February next year. The UK government has said it will not request an extension to the current transition period and if a deal cannot be reached then it is prepared to walk away from negotiations. The UK-EU have until 26 November to agree a trade deal but only until 30 June for the UK to request an extension. It was confirmed over the weekend that Michael Gove has been chairing regular meetings for the “no-deal” committee and that a number of civil servants who had been moved across to help with the Covid-19 crisis were now returning to help with Brexit preparation.
Investors deem the WTO option negative for the pound as the UK would lose direct access to the EU’s Single Market and could become less attractive to foreign investors. Last time, the possibility of no-deal increased, we saw sterling tumble to 1.06 against the euro and 1.20 against the US dollar.
Europe looks to return to normal life as last week the continent initiated the relaxation of strict lockdown measures and began attempting to live with the Covid-19 disease. Eurozone GDP crashed 3.8 percent, with Germany falling 2.2 percent in the first quarter of the year although like the UK, economists expect a significantly bigger drop over the coming months.
Covid-19 has proved an unprecedented shock to the eurozone economy, widening divergence between the northern and southern states, and raising concerns over long-term debt sustainability. If the issue is not addressed effectively, the long-term success of the monetary union is at risk. At no point in history has a monetary union succeeded without centralised fiscal management.
In addition, Germany, which has always been against eurozone debt mutualisation recently confirmed a ruling by their supreme court that the asset buying programme between 2015-2018 was not legal, which now sits the eurozone’s largest economy at odds with the European Central Bank.
The Covid-19 epicentre is now firmly in north America with the US nearing 100,000 deaths and more than 1.5 million infections. Retail Sales data on Friday confirmed a record contraction of 16.4 percent in April and there are now 36 million unemployed Americans with a further 3 million filing for benefits. US economic data has been disastrous creating a “risk-on” approach from investors, helping to send the dollar higher against the pound and euro, and with the economy being the most important factor to the elector, President Trump is desperate to get the economy going before the election later this year.
Federal Reserve Chairman Jay Powell warned yesterday that the US economy may not fully recover until a vaccine is found, which could take more than a year. Powell said that he thought the US economy would make a slow recovery in the second half of this year, assuming there was no second Covid-19 wave. Trump is hopeful that he can have a vaccine in place by year end but public health experts like Anthony Fauci say it will likely be longer.
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