This week has actually been better for sterling, with the pound rising off the lower levels seen last week. Last week’s fresh 35-year low on GBPUSD and 12-year low on GBPEUR interbank exchange rates epitomized the global attitude to the currency, as investors became very fearful of the future for the UK economy and abandoned the pound.

The difference this week is a fresh range of stimulus by both the British and United States governments, a whole range of measures designed to boost confidence and reverse sentiment. Key features of these packages include for the UK, the promise to pay 80% of private sector workers wages, up to £2500, and a similar measure for the self-employed.

In the United States, a 1.8 trillion-dollar scheme included paying millions of Americans a cheque of $1200, helped to echo the unprecedented steps being taken globally to shore up confidence.

Sterling has bounced off the bottom of last week lows, as the significant global response to the crisis helps to deliver some confidence of an eventual path through the economic crisis, and shows the government and central banks are ready to fight this and provide support.

Sterling Continues to make headway against basket of currencies

Still early stages of COVID-19

However, with us still being in the very infancy of the true and final effects of the pandemic, it seems reasonable to suggest there will continue to be considerations by the markets over the outcomes. Sterling has lost significant ground owing to the British economy’s reliance on inward investment into British assets to support the currency.

Whilst global confidence has been ratcheted up a couple of notches following the extensive measures taken by the central banks and governments, the UK remains in a difficult economic position, particularly given the backdrop of Brexit and the lack of clarity over what might lie ahead further in the future.

With people cheering in the streets last night to clap the NHS, as many other countries globally are doing for their health professionals, there is a clear underlying resilience around to fightback against this situation. Sterling remains lower but there is also an underlying resilience being displayed here too, which has tempered further losses this week.

Why is the Euro Performing So Well?

A question I am often being asked is ‘why is the euro so strong?’ With the COVID-19 situation greatly affecting both Italy and Spain, two key economies in the Eurozone, there are economic arguments to suggest that trouble might be brewing ahead for the economic conditions in these countries and across the single currency bloc.

The reason for current euro strength is that the lower interest rates in the Eurozone have seen the euro used as a funding currency, where investors have historically been borrowing in the currency to fund investments. The recent market turmoil has seen investors sell off more risky (yet higher yielding) investments globally, and repatriate the funds in euros, increasing demand and the strength of the currency.

European Central Bank Update Today

The European Central Bank (ECB) has also launched a €750 billion ‘PEPP’, or Pandemic Emergency Purchase Program, to help increase confidence in the region. Financial markets are confident from the measures being taken by the authorities that there is a willingness to act and respond.

Despite these important reasons for the strength of the euro, which had seen it reaching a 12-year high against the pound last week at 1.0533 on the interbank rate last week, there does remain some tough economic questions ahead.

A flash Purchasing Manager's Index (PMI) report this week, which provides a measure of business confidence ahead, indicated the worst on record since 1998, with a reading of 28.4, on a scale of 1-100 where anything below 50 represents a contraction.

The European authorities are taking good measures against the economic effects of the Coronavirus, but the longer term harm is difficult to quantify at this time, and might lead to further volatility in the future for the single currency.

Unprecedented Fiscal Measures from the Fed this Week

For the currency markets, this week has been all about the American response to the COVID-19 crisis. Investors and markets have been urgently seeking greater clarity over not only what the pandemic will mean, but also how the central banks and governments will respond.

The response by the United States has been groundbreaking and has marked a turning point in sentiment, with stock markets rising and some currencies turning around. The US dollar is a safe-haven currency that will perform well in times of uncertainty, as investors seek safe shores away from the risk of holding other ‘riskier’ investments.

US Dollar Losing Investor Confidence

The greenback had been climbing but has lost value to the end of this week, following the 1.8 trillion-dollar package announced by the government. Throw in some unlimited Quantitative Easing (the buying of assets by a central bank), and you have some unprecedented measures for some unprecedented times.

This confidence has seen a reversal of the safe haven status, with investors becoming gently more confident to invest elsewhere, leading to the US dollar falling against both the pound and the euro as we end the week.

There are now more reported Coronavirus cases in the US than China, and whilst Trump has called into question the legitimacy of both global figures and the appropriate responses, few can doubt that the US could because of all of this find some challenges on its hand in the future.

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