Gross Domestic Product released this morning at 7 am for the UK has shown a record 20.4% fall in economic output, the largest fall since records began in 1997. The news has added some further weight to the pound which fell yesterday as sentiment on the global economic outlook declined sharply.
The currency markets were dealt a fresh blow of reality as fresh fears have arisen over a possible second wave of infections. Whilst the news came from Texas and the US predominantly there is a fear that lockdown restrictions might be being eased too quickly.
Sterling had been rising gently this month with improved overall confidence and a gentle ‘risk off’ approach by markets as the world was gently easing restrictions. However, a bleak outlook from the US Federal Reserve on Wednesday and growing fears of a second global wave of infections triggered a sell off on global stocks. This led Reuters to label the pound once again a risky currency, finding itself on the wrong side of market sentiment or confidence.
Reuters also reported yesterday the net short positions for the pound were at their highest since November indicating a number of rising bets that the pound will lose value ahead. For the rest of today there is limited UK data but next week could be a major time for the pound with the latest EU Brexit Summit and also the latest Bank of England Interest Rate decision.
To understand currency market movements right now it is good to understand ‘risk sentiment’ and confidence. Essentially in times of less confidence safe havens like the US dollar rise and risky currencies fall. Whilst in confident times the safe havens lose ground and the risky currencies gain.
Whilst what happens in America to the US economy and currency may seem very distant to some of us in the UK, Europe and Asia, the US dollar is truly a global currency and to understand GBPEUR, GBPAUD and many others it is important to understand too market confidence and the behaviour of the US dollar.
You can also usually link behaviour and movements on most currency pairings to sentiments on the US dollar, and it was the declining lack of confidence yesterday as news broke of 2,500 new cases in Texas, the highest since the pandemic began as reported by the Times, which raised concern.
Where is the pound headed next against the euro is a very valid question as we approach some potentially market moving events. Next week could be a crucial as the market gets fresh news on two issues which have been really driving the value of EURGBP rates, namely Brexit and policy from the Bank of England, in the light of COVID-19.
The release of the latest UK interest rate decision will hopefully provide more insight into the potential for negative interest rates for the UK, the potential for further Quantitative Easing, and any fresh outlook and forecasts from the Bank of England.
Whilst Bank of England Governor Andrew Bailey has said this week he can see ‘green shoots’ in the economy, given the latest GDP figures and rising concerns about whether easing restrictions is wise, the potential for steps back definitely exist. We know from yesterday’s movements how sensitive the pound can be to these waning sentiments.
On Brexit, the lack of progress so far and low expectations for Brexit talks next week, lends support to the view we are headed for a no-deal Brexit with the EU, as both the UK and EU stick to their guns in the negotiations.
The EU’s chief Brexit negotiator Barnier has implied the UK’s demands are far too close to that of an EU member to be acceptable. Reuters quoted Michael Hewson of CMC Markets, “Those comments by Barnier yesterday really sort of highlight the fact that we’re heading for no deal and really it’s a question of how that gets mitigated”.
For any clients interested in the pound who have been holding on waiting to see a move higher or lower, these pieces of news next week could be just what you have been waiting for. Speak to our team about Limit and Stop/Loss orders, and to be kept up to date as the news unfolds and the market reacts.
News of fresh spikes in the number of cases in the US saw stock markets fall as investors sought the safety of the havens, with gold and the US dollar rising. US stocks had their worst day in 2 months yesterday, with the Vix volatility Index climbing to 33, its biggest one day jump since March.
Texas has been one of the first US states to ease restrictions and could be a canary in the mine as to how the rest of the US will be responding to further easing of restrictions.
Today will be an interesting day as we learn whether the declining confidence from yesterday which drove movement reflected an actual turning point in sentiment which had generally been improving of late, or if this is a return of the fear factor which may further drive the moves seen yesterday.
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