The pound dropped against all major currency pairs yesterday, with the exception of the under pressure South African rand. After starting the day brightly, weak economic data in the form of Markit Construction PMI was released considerably below market expectations, and this appeared to change the course of the pounds performance.
Earlier in the day we had seen the pound to euro exchange rate test the 1.15 level, which is a pattern we’ve seen repeatedly for almost a month now. The 1.15 handle appears to be a level of resistance so sterling bulls will be looking for some positive information or sentiment regarding the UK that could push GBPEUR above this level.
PMI readings tend to be forward looking and sentiment based, so it’s not surprising that the pound dropped as a result of yesterday mornings below expectations reading (8.2 versus an expectation of 22, with any figure below 50 demonstrating a contraction).
First Quarter GDP figures, which cover economic output will be released for the UK next week and the markets are already looking forward to this update. The US and Eurozone readings have already been released, and demonstrated considerable contractions as expected due to the lockdown rules imposed in order to try and counter impact of the Corvid-19 virus. As lockdown measures were implemented at differing times across the globe, some market analysts are already looking to indications of 2nd Quarter GDP figures, which is perhaps why the markets reacted heavily to the Construction PMI reading out of the UK yesterday. PMI’s figures are released monthly and are therefore more up to date, readers should be aware of the UK Q1 GDP reading next week which will be released in the early hours on Wednesday.
Earlier this morning the Bank of England (BoE) took the unusual decision to hold its Interest Rate Decision and Monetary Policy Statement at 7am. All voting members voted to keep interest rates on hold at 0.1% and the BoE warned that the coronavirus pandemic will push the UK economy towards its worst recession on record. They believe the economy will shrink by 14% this year, and that is based on the lockdown rules being relaxed in June. UK Prime Minister Boris Johnson is expected to outline the governments plans for lifting restrictions on Sunday, with some changes expected to begin on Monday. One area where the BoE voting members did disagree was regarding whether to inject more stimulus into the economy or not. This is worth following as it could impact GBP exchange rates. The pound has climbed in the wake of this morning’s announcements, gaining half a percent against the USD and the EUR.
The euro is trading around its lowest levels against the US dollar in almost 2-weeks at the moment, as tensions within the trading bloc are surfacing. This week German lawmakers have upheld several complaints and provided the European Central Bank (ECB) with 3-months to prove that its current asset purchasing programme is needed. Top lawmakers within Germany believe there isn’t a requirement for Germany to purchase these government bonds, and has declared that the country’s central bank, the bundersbank will stop buying them if there is no need. The ECB is likely to win this case according to market analysts, but its another case of tensions between the different regions of the Eurozone regarding debt management, especially between the debt laden south and the north.
The USD index rose to its highest level in a week yesterday, as risk appetite within financial markets waned as a raft of poor economic data was released. The safe haven status of the US dollar was on display as it climbed, along with the Japanese yen which is another safe haven currency that benefits during times of market uncertainty.
UK construction PMI fell to its lowest level on record, and UK and Eurozone manufacturing figures were also weak as business has ground to halt during the lockdown. US Services data on the other hand was better than expected and this has helped the US dollar strengthen furthermore.
Tomorrow could be one of the busiest times for the USD this week as Non-farm payroll figures along with US Jobless Claims will be released covering the US jobs market. There have been record unemployment claims in the US since the US government issued its lockdown so we could expect these figures to be watched closely at the time of release which will be 12.30pm UK time.
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