Sterling has dropped consistently over the last two weeks against the euro and the US dollar from 1.128 to 1.108 and 1.275 to 1.235 respectfully on the interbank exchange.
Elements of this downtrend may have arisen as the UK is still globally ranked in 3rd place as the worst virus-hit country as the country begins to culminate ongoing loggerheaded Brexit negotiations back into the picture. It seems as though the vast majority of countries are solely looking to redevelop their economies and get their financial strength back to the pre-COVID-19 stage and yet, the UK has to tackle the pressure of leaving the EU without a trade deal in place by the end of the year. Once again, the all-too-familiar responses by PM Boris Johnson of not extending the deadline past December 31st have been matched by a rising number of analysists suggesting that there is not enough time left to organise a deal in the remaining five and a bit months.
In more positive news, UK unemployment rates, much like many data releases mentioned in this market report, are starting to regain their lost ground as the rolling 3-month period last week came in at 0.6% better than the previous recording at 3.9%. However, the real talking point moving forward may be a few months down the line in October when the government furlough scheme drops its salary provisions from 80% down to 20% and businesses will have to decide either that they can financially compensate for the shortfall or to begin employee redundancies. It is the uncertainty of the ongoing government plan that is still very much up in the air and keeps the currency market highly sensitive to any movements in sentiment and unease. This could have the potential to contract GDP more than the 20% already recorded recently with a reduced labour force which typically comes hand-in-hand with Sterling weakness against many other currency counterparts.
From data releases going forwards, we will see UK Market PMI announced on Tuesday which is anticipated to come in at 40 in comparison with last month’s recording of 29.
On another note, Rishi Sunak and Boris Johnson have said that they are considering “bringing forward proposals” to reducing the social distancing measures from 2m down to 1m in line with many European guidelines provided that sufficient measures were taken to keep virus transmission minimal.
Europe also follows the UK when it comes to more optimistic data releases as last week’s German ZEW survey last week came in at 61 in comparison to the previous recording of 51. The survey conveys the current level of market sentiment and investing and with any results above 50 being positive, or bullish, the eurozone survey essentially suggests that economic conditions are on the rise for the latter half of 2020. German and European Markit PMI Composite is also published on Tuesday with previous recordings of 32 for both looking to rise to 44 and 41 respectively. Whilst still a negative, or a bearish release, the growing positivity will be a breath of fresh air for the markets who are still reeling from the pandemic.
In Germany today, recent reports have been confirmed that 1000 workers have been infected with Coronavirus at the Tonnies meat factory which has led to 7,000 friends and family members being quarantined for a minimum of two weeks. The recent outbreak has been the worst rise in cases in the EU so far and is expected to continue to increase as testing is still ongoing. The reason for the outbreak had supposedly been attributed to poor working conditions such as being cramped and having poor hygiene and the governmental response has not ruled out re-imposing the lockdown measures. Whilst this is an isolated incident, should case numbers continue to rise and Germany go back into a partial lockdown there could be severe implications for the economy and has the potential for currency weakness moving forwards.
On a final note for the Eurozone, Thursday will bring with it the European Central Bank monetary policy meeting giving its overview into the health of many different sectors which could provide some additional firepower for the euro as it currently sits at an 11-week high against the pound not seen since late March. With rates moving towards the lockdown high of 1.06, clients holding euros and wishing to trade please contact your trader here at Foreign Currency Direct for an evaluation of your trading positions.
Thursday will also be an interesting day for the USD as it sees the GDP Q1, initial jobless claims and non-defense capital goods orders. GDP is anticipated to come in at -5%, just a quarter of the UK’s shortfall, but the United States economy is so much larger making it a very significant announcement. On the other hand, goods orders are expected to rebound in line with British and European sentiment as the previous 6.1% contraction improve to 2.5%.
Other industries have also welcomed the improved trading conditions as retail sales in the US have bounced back from the historic April lows at -12.4%, flew past market predictions of 4.7%, to last week’s recording of 11%. This is very positive news for the retail industry, especially in the wake of the nationwide looting that had previously occurred from the Black Lives Matter (BLM) protests.
Following these BLM protests, and the more recent pulling down of slave trader-related statues, the US could have the potential to follow the recent developments in Germany with the increasing virus cases as a result of the lack of social distancing measures being imposed from multi-thousand strong clusters of people. It’s true that complacency has gradually found its way into society of late and as the US continues to have the highest number of daily testing worldwide, they could be one of the first countries to see a second wave of cases should the protests continue.
On a more political stance, the presidential elections are coming back round again and current president Trump’s rally in Tulsa have disappointed somewhat as the turnout had left many of the 19000-seat arena empty. Suggestions have been that supporters were cautious as a result of the virus whilst others have mentioned that Trump’s handling of the virus and BLM protests has reduced his following in the run up to his potential re-election. A presidential re-election, or possible surprise instating of a frontrunner presidential candidate, has the potential to cause market volatility for the USD later this year. The UK for instance has the virus and Brexit to contend with and so the lack of clarity as to how the US may run moving forward could play into the exchange rates.
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