Sterling has continued its fall this week and now sits near its lowest levels against the EUR and the USD since the end of March when reviewing the inter-bank exchange rate.
Last week, UK GDP figures confirmed the fears many had forecasted about the sharp and potentially long-standing impact of Covid-19 lockdown. The UK economy contracted by 2% in the first quarter of 2020, the sharpest contraction since the 2008 financial crash. The sharp fall is even more worrying as the lockdown only started on the 23rd March. There was a slow-down of business activity the previous week but in that two-week period it resulted in a record high of 5.8% fall in GDP in March. Deloitte now forecasts the GDP contraction to peak at 11.77% for the year with a growth of 8.5% in 2021.
This week we have seen UK unemployment data which was released yesterday morning for April, the first full month under lockdown. Over 2 million people are now claiming benefits representing 5.8% of the population. The director of the National Institute of Economic and Social Research, Jagjit Chadha, when speaking to the BBC said: "We can reasonably expect unemployment to rise very quickly to something over 10% - something we haven't seen since the early 1990s." Other indicators like footfall on the high streets also showed how challenging trading conditions have been through the lock down with footfall falling by over 80% in April.
Brexit talks are ongoing and with deadlines coming these talk have heated up. Last Friday, Michel Barnier, the EU’s chief negotiator said negotiations have been “very disappointing”. Neither the UK or Europe have suggested that they want to extend the transition period. It was reported last week that the UK’s chief Brexit negotiator, David Frost, has issued EU officials with a two-week ultimatum telling them to compromise or the UK could walk away.
Yesterday the UK government released plans for tariff cuts after Brexit which would come into effect from the 1st January 2021. This could be negotiation positioning, but talks have certainly evolved under Covid. The argument that a ‘no deal’ would be too expensive for the UK has been dwarfed by the debt being taken on in the wake of the pandemic.
The next round of talks is in June but currently trade talks don’t seem to be getting close to an agreement meaning it is a real risk to consider if you have any transfers planned in the near future with the pound, Brexit could well take centre stage once more in the weeks ahead.
This morning we have UK inflation date and on Friday we have both UK Retail figures and Public Sector Net Borrowing. UK Inflation was confirmed at 0.8% in April as reported at 7am this morning. This was the lowest reading seen since August 2016 and was put down to the fall in oil and energy costs. UK Retail Price Index which is another measure of inflation was also released in the early hours today and showed a drop to 1.5% for April down from 2.6% in March.
Tomorrows public sector borrowing will be keenly watched for a further indication of the health of the UK economy. Under the pandemic and lockdown, public spending has climbed significantly. The impact to the value of the pound could well be based on comparing the debt to GDP ratio against different currency blocks.
The impact of the virus on the UK economy and wider afield is now starting to be reported, but focus moving forward for the currency market and the price of currencies will be the speed at which the return to ‘normality’ takes place. In the UK 17,000 people have now been hired to help trace those with COVID-19 which started on Monday. Rishi Sunak, UK chancellor, announced last week that the furlough scheme would be extended to October although employers will be expected to share costs from August. In last nights update he also went on to say that the economy may not experience an “immediate bounce back” and that the UK faces a “severe recession the likes of which we haven’t seen.”
Germany, widely regarded as the engine room of Europe due to its economic might, have not been able to protect itself from a contraction in activity as a result of the pandemic and last week reported a contraction of 2.2% for the first quarter of the year. Initial estimates suggest that the wider euro area as a whole shrank by 3.8% in the first quarter.
This morning the Eurozone report on consumer spending for April which will be the focus for the GBPEUR pairing. The expectation by FX street is for a fall to be seen but the difference between said forecast and the real figure is likely to be the focus point and has the potential to move the market price if vastly different.
GBPEUR levels currently sit towards the lowest levels seen since the end of March with a number of financial institutions suggesting conflicting next steps for the pair sighting internal pressures within the block could weaken EUR and that Brexit negotiations could conclude at a no-deal agreement moving forward.
For the latest information on the pairing and the facts driving the market currently please get in contact with the trading team here who are well placed to update you with the live events as they happen.
Progress with drug trials have been positive and has created some confidence in the market, which has in turn could been attributed towards some USD weakness as investors move out of the traditional safe haven currency.
Last week, the US released retail sales figures which showed a contraction coming as no surprise with most states being in lockdown due to the pandemic. Overall retail figures fell by 16.4% between March and April. The virus seems to really be gaining at a rate in the US with the latest official death numbers being reported from the United States.
There have been mass unemployments and US economists now expect the US unemployment rate to reach as high as 17% in June. 20 million officially lost their jobs in April. Other financial institutions paint a worse picture still with Goldman Sachs last week suggesting it would climb as high as 25%.
The Fed's balance sheet is on track to reach $9 trillion by the end of the year. At the current pace, the Fed is injecting nearly $1 million into the financial system every second. Later this evening the Federal Open Market Committee (FOMC) minutes are released and again could show insight to the next steps for the US economy and therefore the value of the dollar moving forward.