The pound continued to be on the backfoot yesterday, closing at 1.1001 against the euro and 1.2119 against the dollar. The pound has suffered its biggest falls since the coronavirus pandemic erupted and it is currently testing the lows seen in the market in August last year.
Speculation that the Bank of England might start a new round of quantitative easing and further rate cuts has pushed the value of the pound lower. James Rossiter, Head of Global Macro Strategy at TD Securities said “We now expect the Bank of England to cut the bank rate to 0.10% at its policy meeting next week, and to announce a quantitative easing program somewhere in the range of £50-75bn, including some corporate bond purchases”.
Trade talks between the UK and EU will not take place as scheduled today, but a draft version of the agreement with Brussels is expected to be released in the UK in the near future. With Brexit uncertainty still overshadowing the UK coupled with further quantitative easing, this will likely put further pressure on the UK’s current account deficit. The UK relies on steady inflows of investment from foreigners seeking to take advantage of the UK’s attractive investment climate. However, with global investor sentiment being compromised as a result of the coronavirus, this could weigh heavy on the pound.
Yesterday, a new lending scheme was launched to provide short-term bridging finance for large businesses affected by the coronavirus. The Covid Corporate Financing Facility, announced by the Chancellor of the Exchequer Rishi Sunak, will buy commercial paper debt with a 12-month maturity, and will help businesses to pay salaries, rent and suppliers. Separately, he said they would also provide £330 billion of loan guarantees to business and an extra £20 billion of direct aid.
Meanwhile on a positive note, the UK average earnings Index released yesterday for January came in better than expected at 3.1% against a forecast 3% and the UK claimant count change for February came in better at 17.3k against a forecast 21.4k.
H&M the world’s second largest fashion retailer announced yesterday, it was temporarily closing over 500 stores in Europe. This is another sector announcing closures following announcements last week from the car manufacturing sector that Ferrari, Fiat-Chrysler, Ford, PSA Group, Renault, VW, and Daimler have all halted production in Europe.
Spanish Prime Minister Pedro Sanchez revealed a €200bn package worth 20% of GDP aimed at supporting the Spanish economy. This follows on from Monday when French President Emmanuel Macron, announced a €300bn package to support the French economy.
Most of the recent data releases is pre-coronavirus; however, the German ZEW survey for March released yesterday is one of the first indications of economic activity when the virus was starting to impact.
German ZEW economic sentiment for March came in at -49.5 versus a forecast -26.4 and German ZEW current conditions for March came in at -43.1 versus a forecast -30. The index gauges the six-month economic outlook, with a level above zero indicates optimism; below indicates pessimism. The Eurozone ZEW economic sentiment for March was equally pessimistic, coming in at -49.5 against a previous reading of 10.4.
The market will be closely watching the data release at 10am this morning which publish Eurozone consumer price index (CPI) data for the month of February that is currently forecast at 1.2%.
The US Federal Reserve dramatically cut rates by 100 basis points on Sunday, taking US interest rates to a low of 0-0.25%. It is understood the Federal Reserve will also engage in quantitative easing buying at least $500 billion of treasuries and $200bn of agency mortgage-backed securities with ongoing monthly support possibly around $60bn.
Typically, a currency experiences weakness as a result of these actions. However, the US dollar is approaching its strongest levels we have seen in the market over the past few years.
“There is still a tremendous amount of demand for the USD in the financial system that is squeezing the FX markets, and we are still in early days of the shutdown of sectors of the economy around the globe,” said W. Brad Bechtel, global head of FX at Jefferies Group.
US core retails sales and US retails sales data releases for the month of February came in weaker than expected at -0.4% against a forecast 0.2%, and -0.5% against a forecast 0.2% both indicating a decline in consumer spending. This was offset however with better than expected US JOLTs job opening data for January coming in at 6.963m versus a forecast 6.476m.
The US announced yesterday that they may have found a vaccine, and the first human trials have started. Experts say it could be months before they know if this or any other vaccines works and could take up to 18 months for any potential vaccine to become available to the public. While the uncertainty of Covid-19 and investors’ fears prevail, we could see the dollar continue to gain value as investors flock to the safe haven currency.
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