GBP started the week off rather neutral following a late spike towards the latter stage of the week. The Sterling was lifted last Thursday and buoyed further on the Friday following the release of the UK’s January retail sales figures and February’s PMI surveys which cast the domestic economy in a much brighter light than had been anticipated. However, gains were not enough to fully reverse earlier declines. The pound to euro exchange rate closed last week at almost a full percent lower after sustaining heavy losses on Wednesday which dragged the currency back below the 1.20 threshold. As a result, the market started the week with a neutral outlook for the exchange rate pairing.
The pound started the week off on a 0.2% dip against the euro, with the pairing trading at around €1.192. Brexit fears escalated on Monday after France highlighted that it would not sign up to a bad trade deal with the UK simply to meet Downing Street’s strict deadline. With the EU-UK trade talks set to kick off in March, the two sides have laid out their interests on the table. The market has noticed that the two have done so in a more confrontational manner than expected, which has weighed on GBP as doubters question the probability of attaining a trade deal at all with the EU. Brexit has been one of the major drivers for the pound and with fears rising over a no-deal Brexit once more, the pound is likely to feel the effect in the lead-up to the December deadline.
Gains came for the GBP on Tuesday following Monday’s market sell-off. Stock markets, oil prices and risky currencies bounced off their lows whilst gold, government bonds and safe haven currencies saw highs at the start of the week. The publishing of the EU’s Brexit mandate caused little concern for the UK economy, with the guiding principle being that the EU is looking to even the playing field by keeping the UK tied to the bloc’s regulations in exchange for a free-trade deal.
Meanwhile, the pound struggled to find positives in its data releases, with Wednesday showing a fall of -0.6% for the British Rail consortium (BRC) Shop Price Index and whispers of a BoE rate cut infiltrating the airwaves once more. Thursday saw GBP slump against EUR as the UK government delivered its mandate in response to the EU’s counterpart on Tuesday. With the EU demanding that the UK conforms to EU laws, rules and regulations post-Brexit, the tensions heightened between the two. The UK responded to this yesterday by threatening the EU with a no deal Brexit if the two could not come to an agreement by June 2020. This added further tensions to the EU-UK trade talks which got investors fears of a ‘no deal’ Brexit peaking.
The GBP/EUR exchange rate failed to recover the 1.20 handle ahead of last weekend, which landed the pairing with a neutral bias to start the new trading week. Some strategists have suggested that the bitter tone concerning the trade talks between the UK and EU could soon weigh heavier on sterling which would allow the euro to edge over it.
Monday morning saw the release of the much anticipated German IFO business climate index which was set to be closely watched as an early indicator of current conditions and business expectations in Germany. With the euro finding a late rallying point last week in its PMI releases and a sudden drop in the USD, the IFO survey was on many investors radars to start the week off on the right foot. This was the case for the euro as results for the survey came in above predictions, giving the euro a boost, with EUR/USD exchange rates hitting fresh session highs.
Heading into mid-week, a rising number of cases of the COVID-19 coronavirus in Italy and other parts of Europe weighed on the Euro as other riskier currencies were seeing some relief. The German 10-year yield fell to its lowest level since October as European investors continued to invest in government bonds as a safe haven. The lower yields available in Europe made the EUR less attractive than the GBP and other higher yielding currencies.
The final reading for the German GDP came in line with previous estimates of 0% quarter-over-quarter and 0.3% year-over-year in the mid-week. Survey estimates from purchasing managers shot higher in February in a sign that the first quarter could see Germany return to growth. However, the disruption to the economy from the coronavirus could see that all reverse again in March, risking another disappointing quarter for the German economy.
Towards the end of the week, the euro rose following the announcement from Germany that it will look to suspend its debt break provision in the German constitution to allow higher deficit spending in order to combat the country’s economic slowdown. But with the impact of the coronavirus yet to be fully felt by the Eurozone economy, and thus investors remain anxious for the weeks ahead.
To start the week, The US dollar (USD) held a strong position, this cames after heightened fears concerning the coronavirus over the weekend which saw investors once again flock to the USD as a safe haven currency.
As the US dollar ventured into the second day of trading, USD price action continued to trend lower from three-year highs as traders ramped up dovish expectations for the Federal Reserve amid mounting coronavirus concerns. The US dollar looked to face more downside potential as market participants re-accelerated future Fed interest rate cut expectations considering an inverted yield curve and rising recession risk.
Into mid-week, the US dollar was trading relatively soft against its rivals, with the market predicting that the Federal Reserve will be more likely to ease their monetary policy and cut their interest rates in the month to come, which sent the USD lower. The USD was 0.2% lower against some of its major rivals on Wednesday at 99.19, which saw the currency drift away from the three-year high it saw last week against the euro. Investors remain in wait for the Federal Reserve’s decision in the next months concerning their monetary policy, the market has priced in a 25-basis points cut for the meeting in June. For the year, traders expect the US central bank to lower rates to between 1% and 1.25% down from the current 1.5% to 1.75% range.
Heading into the end of the week, USD saw a three-year high on Thursday as investors concerns continued to grow about the coronavirus outbreak, with the first US case springing up during the week in California. Despite the panic, the US dollar has fared well, and with President Trump boldly confident that the US will control the disease, investors continued to pour money into USD.
The Australian dollar dropped at the start of the week which left the currency on the back foot on the opening day of the trading week. As appetite continued to fall, AUD was sent into a fresh 11-year low. Fears concerning the COVID-19 disease spiked over the weekend, lowering the markets willingness to take risks, as a result the risk-sensitive AUD took a hit. New cases continue to be reported across the world, with the majority of infections in China but other countries like South Korea and even Italy have been hit badly. The World Health Organisation’s (WHO) chief Tedros Adhanom Ghebreyesus warned that the window of opportunity to contain the virus is ‘narrowing’.
Heading into mid-week, AUD lost weight to the pound, with the rate fluctuating around £0.508 as China’s COVID-19 outbreak persisted to weigh heavily on the market’s risk appetite, thus sending the risk-sensitive AUD lower. The disease continued to keep the AUD in a stranglehold as new headlines showed little signs of a let-up. The Australian dollar sunk to a 10-year low on Wednesday, the lowest the currency has traded since March 2009. Investors continued to price up the possible cost to the global economy that the spread of the coronavirus. However, strategists at Westpac noted that the risk-sensitive currency is “not cheap”.
The Aussie dollar is amongst the most at risk currencies on the global trading market given the strong trading ties between Australia and China. Combined with this, AUD also has a broader exposure to commodities which when combined with the COVID-19 virus, explaining how the currency has managed to fall 6.2% against the US dollar and 4.43% against the pound this year.
The outlook for the Aussie Dollar up ahead continued to be coronavirus-focused, with little economic data to rally around, the currency remains at the mercy of the markets risk appetite which looks to be stuck in the ‘risk-off’ position for the foreseeable future.
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