The impact of the pandemic in both speed and severity has been far greater than the last recession in 2008-09. In 2009 the global economy shrank by just 0.1%, far different from the latest International Monetary Funds (IMF’s) prediction for 2020 of nearly 5%. This has been revised up by the IMF recently which had initially expected a contraction of 3.0% back in April. The World trade Organisation (WTO) is estimating the second quarter trade levels to be 18.5% down year on year, the steepest decline on record.
Business activity is however now returning as lockdown eases, but the conversations and predictions around what the recession may look like is still being debated. The ramifications to national debt is of particular concern and a return to pre-Covid levels is being forecasted by Deloitte as potentially taking years rather than months.
The risks of a second wave of the pandemic are becoming more of a reality unfortunately which is having an impact on the value of currencies. The number of new daily cases are reaching new record highs almost daily, and in the US the rolling 7-day average of new cases reached over 33,000 last week. Yesterday the US reported over 50,000 new cases suggesting this weeks average could be higher still.
Here in the UK the 7-day average fell to 1,073 as of 26th June, the peak was 5,519 on 14th April. UK Lockdown restrictions are due to be relaxed this coming weekend with bars and restaurants re-opening. However regional flare ups may become more likely with Leicester becoming the first to enter a second lock down this week.
All of this is being keenly watched and has the potential to impact the value of sterling as it could directly impact the speed and indeed rate of commerce in the UK. As the UK service sector contributes a larger percentage of the overall GDP figure in comparison to the eurozone, it has the potential to weaken GBPEUR rates moving forward.
Sterling exchange rates have climbed against most currencies over the last 36 hours after falling to new lows earlier this week against both the single currency and the USD. GBPEUR rates have climbed over 1.5% since the lows seen on Monday and 1.3% against the USD.
The events to potentially watch for Sterling movement going forward remain linked to the potential of a second wave but equally government policy announcements about how the country plans to response and grow thereafter.
Boris Johnson's has however announced the 'new deal' this week – committing to £5BN of additional spending equivalent to 0.2% of GDP – This is aimed to go into infrastructure projects to further help the economy recover. This however has been argued is bringing forward plans already in place. Mr Sunak, Chancellor, has previously delayed any announcements of further spending commitments over the £133bn on the basis that he wanted a clearer understanding of the problems facing the economy, as reported in the FT.
Earlier this week Andy Haldane, the Bank of England’s chief economist, suggested data that the UK is on track for a V-shaped recovery, suggesting a quicker recovery over that of a W-shaped recession other financial institution have predicted.
There are several economic data releases due on the UK’s economic health on the 14th July including trade data, GDP figures and unemployment figures which will be a big day to be aware of if you have exposure to the pound sterling in the near or medium term.
The eurozone was originally the first epicentre of the pandemic, they were one of the first to impose lockdowns and indeed one of the first to get people back to work last month. This was equally shown in manufacturing data released yesterday. It showed a higher than expected figure giving the euro some strength on its release.
Chris Williamson, chief business economist at IHS Markit commented: “The final PMI numbers for June add further to signs that the eurozone factories are seeing a strong initial recovery as the economy lifts from COVID-19 lockdowns,”
Later today the eurozone release unemployment data along with Production Price index. FX street currently have Production figures expected to show a contraction and are predicting unemployment in the euro area to increase to 7.7%.
What is also worth noting is the European Central Bank’s (ECB) president is scheduled to hold a press conference over the weekend which could well be interesting. The topics expected to be covered are further information around the German legal decision that Quantitative Easing in the past could well have been unlawful.
Please note that we have several tools which clients can utilise to cover movements in market values outside of traditional trading hours. With so much continual updated having an impact on currency values out of hours please ensure to speak to your personal broker who can review these with you with your position in mind.
GBPUSD rates have equally been driven by speculation around a second wave of Covid-19. Equally being aware of the safe status of the USD, demand for the greenback has been changeable in line with general global risk appetite.
Recent reports stated that 1.48m Americans filed a new unemployment claim last week. Which is a similar number to that seen in the weeks before, but compared to levels this time last year are hugely up suggesting unemployment is climbing steeply. In an election year in the US the topic around unemployment could well be a major talking point and one which could easily impact the value of the greenback going forward. Yesterday manufacturing data was also released showing a as expected contraction.
The FOMC minutes were also released last night. At the most recent meeting the FED left policy unchanged including keeping interest rates at the near zero level. No further comments around the possibility of negative interest rates or anything to impact the yield curve where announced, but these are both topics to keep an eye on going forward.
Next on the economic calendar is further unemployment data with non-farm payroll and the overall unemployment rate released today. Last month there was a surprise drop in unemployment so this is a data release which could well carry some weight on the value of the USD in today’s session.
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