Yet another dramatic day unfolded in the UK yesterday with the morning news reporting the emergency decision of the Bank of England to cut interest rates by 0.5%. This now takes the official lending rate from 0.75% to 0.25% - matching the all-time record low.
The hopes of the Central Bank are that this will encourage lending to small businesses and allow some resilience in the face of potential cash flow problems as the economy recovers from a “sharp and large” hit from Coronavirus. With the news released before European trading opened, GBP/EUR briefly slumped to 1.1311 (interbank levels) before recovering and being pulled once more to the 1.14 pivot we have been experiencing this week.
In the afternoon Rishi Sunak’s budget delivered a further message of “stability and security” within the UK financial system. Sunak announced levels of spending unmatched in any budget since 1992 as £30bn was pledged to support the economy during the current Covid-19 virus outbreak, and £600bn of spending within the economy beyond this short-term crisis.
Growth forecasts have been ‘slightly reduced’ by The Office for Budget Responsibility compared to its March 2019 forecast. Without accounting for the impact of coronavirus, the OBR has forecast growth of 1.1% in 2020, 1.8% in 2021 and then 1.5%, 1.3%, and 1.4% in the following years.
As the pound continues to feel the impact of current uncertainty, the EUR continues to hold strength against both GBP and the USD. The EUR has made huge strides in value against the USD over the past two weeks as investors unwind the carry trade (borrowing a low interest rate yielding currency (EUR) and investing in a higher yielding asset (USD) amidst the uncertainty of the spread of Covid-19, US interest rate cuts and US treasury yields hitting record lows. Although no longer peaking in value the EUR remains in favour with investors.
All eyes rest on the European Central Bank (ECB) meeting today where there is expectation for some action. In addition to a possible further cut in interest rates, some form of bridged funding to SMEs is expected to be announced in order to meet the worsening economic impact of the unfolding Coronavirus pandemic. ECB President Christine Lagarde has indicated that the EU is at risk of a “scenario that will remind many of the 2008 Great Financial Crisis” and that the ECB is considering all of its options ahead of today’s meeting. She continued to express a need for domestic governments to back their policies and continue lending to businesses impacted by the virus outbreak.
The USD has regained some ground against both GBP and EUR in the past 24 hours sitting below 1.29 and 1.13 respectively at the time of writing. The USD had been impacted with the spread of the coronavirus threatening the economy, a sharp fall in tourism and the oil markets plunging. However, following Monday’s financial market chaos which even halted the US stock exchange at one point, calmer trading conditions have returned and the USD has strengthened.
As the World Health Organisation declared the coronavirus a global pandemic, reports suggest that despite Dr Brian Monahan (attending physician of Congress and the US Supreme Court) believing that between 70-150 million people in the US will become infected with COVID-19, hysteria within financial markets has paused to a degree.
US jobless claims are expected to show an increase when released this afternoon as initial ripples of a slowing economy start to filter through however, the Producer Price Index is expected to decline from January’s buoyant 0.5% month on month jump to a more steadying 0.1% for February. This suggests that “it is still probably too early to see any evidence of price rises related to shortages or supply chain problems as a result of the coronavirus,” explains Andrew Hunter of Capital Economics.
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