Today marks the final day of discussions between the UK and EU politician negotiators David Frost and Michel Barnier, as they head towards the upcoming extension deadline at the end of this month. The all-too-familiar differences between the two sides continue the stalemate with the main headlines in the news recently feeling like déjà vu. Yet, promising concessions have been made on both sides regarding fisheries and its respective industry, showing signs things could potentially be moving forwards.
Having said that, the same concessions were also made and subsequently backtracked when it came to the Irish backstop so progress cannot be guaranteed at this time. PM Boris Johnson has repeatedly stated that the UK will not be extending Brexit into 2021 but with many analysts suggesting that 6 months isn’t enough time to realistically get a trade deal in place, pressure may start to mount on the Sterling as it gets thumped by a global pandemic and this political uncertainty.
This has been demonstrated in the GBPEUR mid-market exchange rates declining 3.1% since the start of last month, currently at 1.11. GBPUSD has been more unreliable in its volatility as at the same time last month the rate dropped 2.8% in two weeks and has now rebounded to a 6-week high of 1.26, or a 4.1% gain in the last fortnight alone which has created a large U-shape in the currency pairings trend.
As the UK gets closer to the extension deadline, now just 25 days away, the Sterling could experience some weakness unless further progress is make on either extending the Brexit no-deal deadline or further concessions to help improve the probability of getting a trade deal over the line. What we have seen previously as a general rule is that progress towards a deal has boosted the GBPEUR exchange rates, whilst the possibility of no deal has been very damaging.
Next week the UK matches Europe with some of its economic data releases as the all-important GDP Q1 and Industrial production data will be announced. With the last recording for the UK at -5.8%, it will be interesting to see whether of not there are any significant changes as society starts making their first tentative steps towards a return to normality.
Yesterday the European Central Bank, headed by Christine Lagarde, announced that interest rates were to be kept on hold at a record low of 0%, ensuring that borrowing costs remain low to companies as they continue to experience huge financial deficits. Whilst this null event was expected by the markets, this has been one of the few economic events that is set to remain unchanged. One of the main headlines on Thursday was that of the EU’s plan to utilise $2.7bn to purchase COVID-19 vaccines. These vaccines have not been fully approved and are still in the developmental stages, but with the amount of time and money being used to invest in a cure, the likelihood of a working vaccine being initiated publicly may well occur before the end of the year. However, Boris Johnson’s vaccine purchasing investment at $7.4bn to stop further deaths with the nation still firmly placed within the top 5 worst virus-hit countries.
Germany, widely regarding as the strongest economically performing country in Europe, has made further plans in addition to the emergency EU funding package, to stimulate the struggling economy. Current measures from Chancellor Angela Merkel are to propose providing €300 per child to each family to try and increase consumer spending and pull the financial state of affairs off the ground and push an estimated €130bn back into the Germany economy. It comes at a desperate time for the economic powerhouse as the German’s are expected to brace for the worst recession in 70 years according to the BBC, with the economy set to contract 6.3% this year alone.
To what extent these vital fiscal policies are keeping the Eurozone buoyant is still to be determined but it seems that the EU needs all the help it can get. Some insight into Europe’s current financial standings shall be announced next week in the GDP Q1 and Industrial Production data reports. This may shed some light into the degree to which further monetary policy implementation needs to occur to weather the upcoming recession. However, according to Nicolae Stefanuta, MEP of the Environmental and Public Health committee, there are indicators that the EU’s €750bn COVID-19 emergency fund needs bolstering with estimations that €5tn will realistically be needed to combat the epidemic. Whilst the full financial “firepower” amount at €1.85tn, greater financial input may be needed to withstand the economic fallout.
The USD, with its safe haven currency status, has always held its value as the world’s most commonly traded currency in times of uncertainty, however, it could be a sign of changing times as the USD has experienced significant weakness recently against many of its majority currency counterparts. EURUSD interbank levels have soared 3.6% in the last 3 weeks, at what currently stands at an 8-week high at 1.134 at close of trade yesterday. This market movement could potentially point two ways; it could be a sign that we could be through the worst of the pandemic and so there is less uncertainty and panic globally, or it could suggest that the United States’ economy has been ravaged by the Coronavirus and has left markets reeling.
Frankly, it wouldn’t be overly surprising if it was the latter as financial analysts ADP predict that worldwide financial losses could total $8.8tn with a sizable proportion of that emanating from the US.
What hasn’t helped the US of late is the riots in Minneapolis following the death of George Floyd in connection with a police arrest. Much like what Hong Kong experienced, riots and looting have now continued for a week straight with large retailers such as Target being heavily hit, particularly in a period where sales are vastly down from the virus. It’s unlikely that a lot of USD strength has been affected by these protests but it is a hinderance at a time when the nation needs solidarity to go through these hard times.
From an economic data standpoint, the US will receive the highly volatile non-farm payroll today combined with the unemployment rate which could end this week with even further inroads from Sterling and the Euro if results are negative. The previous result in April for the payroll was 20.5 million job losses with an anticipated additional 8 million set to be lost according to FX Street which could continue the USD weakness we have seen over the past few weeks.
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