Starting the week, GBP was pushed to levels unseen since the market's 'no deal Brexit' fears were at their most severe. Losses of last week's proportion meant that the pound was owed some respite but considering an unprecedented situation around coronavirus, this looked unlikely to be the case.
Throughout the week, GBP investors were hoping to see the UK government impose stricter policies regarding their containment efforts of COVID-19. Before the start of the week, the efforts had only been bumped up to the ‘delay’ phase, which saw public schools remain open. Meanwhile other countries like Italy were on a nationwide lockdown with schools closed, and travel in and out of the country prohibited. The market noted that looking ahead, the only two factors that mattered to investor sentiment and financial market conditions were to be coronavirus data and global policymaker’s reactions to the crisis, these two factors still stand as the most important factors driving the world’s financial sector to date.
Heading into the second day of the trading week, GBP’s weakness looked set to continue as the coronavirus fears were sustained.
Losses against the euro were witnessed, with hints of quantitative easing from the Bank of England (BoE) putting more pressure on the British currency. The market noted that Sterling is particularly vulnerable to the introduction of QE, which may be the favoured method of the BoE up ahead.
Brexit was also brought back up through the week. Given the severity and spread of the coronavirus in both parties’ lands, the bets for a no-deal Brexit have been rising by the day as more individuals from the two parties become infected with the disease. The bets have increased as the market has questioned the UK and EU’s ability to negotiate a trade deal as both economies are facing the oncoming uncertainties from the global economic fallout caused by COVID-19.
Meanwhile, the UK unemployment report for January was announced this week. According to data published by the Office for National Statistics (ONS) the unemployment rate rose from 3.8% to 3.9% in January after the number of people out of work rose by 62,000. The unemployment rate rise sent shivers down GBP investors’ spines as the decline shows a falter in the UK economy before the impact of the coronavirus is reflected. As a result, GBP sunk with investors worrying about the upcoming month’s data.
Despite this deflation in the UK economy, UK Chancellor Rishi Sunak announced on Tuesday evening that the UK has pledged further stimulus to help relieve it. The news prompted slight support for GBP as the market appreciated the measures being put in place for UK businesses. This was followed up later in the week by further pledges of support for those who rent homes as well as self-employed workers. However, the Chancellor’s announcements provided little strength for GBP as investors somewhat shrugged off the support packages after viewing further declines in the Sterling.
The British pound’s recent run has been dreary to say the least, with consistent losses being recorded against both the US dollar and the euro, the UK currency looks in desperate need of a boost. The Bank of England Governor Andrew Bailey noted yesterday that the UK central bank is watching the currency very closely. With the bank’s Monetary Policy Meeting scheduled for the 26th of this month, the market is keen to observe how the bank approaches tackling the recent underperformance.
The coronavirus has taken no prisoners in its global spread from its epicentre in Wuhan, China. Europe is one of the most affected areas outside of China, with Italy, Spain, Denmark and Norway among others going into lockdown to contain the virus. The World Health Organisation (WHO) identified Europe as the new epicentre of the COVID-19 virus, which did little to help the single currency.
Despite the onslaught from the virus, the euro has fared rather well during the economic crisis. But Europe itself has been badly hit by the disease, which is likely to lead to a huge disruption in the economic figures up ahead.
Italy now has the highest incidence of deaths outside China at 1809, with 292 deaths now being recorded in Spain. Spain introduced a new lockdown policy in which residents have been told to remain in their homes or face a one-thousand-euro fine for breaking the nationwide curfew. The market notes that the main factor to reversing the damage caused by the coronavirus lies in the keyword ‘confidence’, but with confidence remaining rock-bottom, the global economy is certain to stay at risk of further downfalls.
Germany received their first timely survey of the economy which gave an account of the coronavirus outbreak. The German ZEW expectations for March came in at -49.5, which was down from 8.7 in February. Consensus readings from the market looked for a reading of -26.4, and the large miss in expectations may explain for the euro’s poor performance throughout trading yesterday. The report confirmed a substantial deterioration in business sentiment owing to the COVID-19 virus. As a result, economists are now suggesting that the largest European economy is now facing a recession.
The European Central Bank’s (ECB) policymakers announced on Wednesday night that they plan to launch a Pandemic Emergency Purchase Programme (PEPP) of quantitative easing that will see Christine Lagarde's Governing Council buy an additional €750 billion in European government and corporate bonds before year-end. Purchases will be conducted at least until the end of 2020 under the new program, which can buy a broader array of instruments than the existing facility, including bonds Greek government bonds as well as non-financial corporations. Following the QE program announcement, the euro dropped against the pound and most other rivals. The decision for QE came after a mass departure from continental financial markets that put simultaneous pressure on risk assets like stocks as well as traditional safe-haven assets like government bonds.
On Sunday evening (US time) the United States Federal Reserve (Fed) announced another interest rate cut. The cut came as a shock to the market; even US President Donald Trump noted in a conference meeting last night that he had only just received word of the cut moments before taking the stand. However, he did note that he was very proud of the move and that it was a great thing for America. The move came as US policymakers attempted to provide dollars to their financial institutions which are facing stress in the credit markets, as well as attempting to combat the economic impact of the global spread of coronavirus.
The interest rate cut from 1-1.25% to 0-0.25% came as a shock to markets, and thus sent the dollar lower. As a rule of thumb, when a central bank makes a significant (and unexpected) rate cut, the currency usually loses value and weight in the market.
In the second trading day of the week, the US dollar managed to recoup some of its losses in the Asian trading session - particularly against the yen - and boosted its gains on risk-related currencies. The volatile trading session only highlighted the fragile confidence in the global markets which have been frazzled of late. Market liquidity was tight, and investors continued to fear the future of the global growth sentiment. Coordinated moves by some of the leading central banks had failed spectacularly to calm the storm against the coronavirus pandemic. The US dollar gained 0.8% to 106.69 yen, with gains also being witnessed against the euro, pound and the risk-correlated Australian and New Zealand currencies.
By mid-week, the US dollar appreciated in value, rising by almost 2% against some of its peers as demand for the safe-haven currency due to the coronavirus crisis was exacerbated by concerns of a possible USD shortage.
This uptrend in the US dollar also came in spite of a surprise contraction in US retail sales last month. The retail sales report dropped from 0.6% to -0.5%.
Thursday saw the release of some important US economic data. The March Philadelphia Fed manufacturing index was unveiled at 12:30 GMT and saw the index drop from 36.7 to -12.7. This result shocked markets and took a large hit at the US dollar’s value. Added to the poor demand for manufacturing, the US initial jobless claims data also revealed startling figures with a rise in initial jobless claims for March rising from 211k to 281k. Claims are often the early warning for labour market problems. Jobless claims for the March 13 week may give hint of coming layoffs. Markets are in an extremely unsettled condition following the coronavirus outbreak and many individuals are losing jobs as businesses are forced into closure.
Monday saw further substantial losses for global stock markets and other assets associated to risk. The Australian dollar is a risk-correlated currency and has seen a downturn since the start of the coronavirus outbreak which hindered investor risk sentiment back at the end of 2019. The Australian dollar, as a ‘risk on’ asset, benefits from investors willing to take risks and usually fares better when the global growth outlook is positive. But with constant fears surrounding the outlook of the coronavirus, AUD has fallen amid market selloffs in times of investor anxieties.
Substantial drops were witnessed at the start of the week as the world’s main exchanges dwindled. Australia’s ASX 200 index - the stock market index of stocks listed on the Australian Securities Exchange - saw a drop of around 40% since the highs of February, a fall which was helped by the shocking 9.7% spiral observed on Monday, a selloff that has merged with an outflow of foreign capital from Australia, which has only added to the Australian dollar’s downside pressures.
The Aussie dollar was also held back by the Reserve Bank of Australia (RBA) which further limited the appeal of AUD in trade through the publication of the minutes from the RBA’s March policy meeting. In the publication the Aussie central bank noted that it stands ready to take action, but at this time it will favour the introduction of stimulus, over making another rate cut.
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