The pound has seen a mixed week of fortunes, ranging higher and lower as the market digests many conflicting signals, much of it linked to sentiment over the Coronavirus and the continued health and economic effects on the global economy.
A key point of the currency markets right now is ‘sentiment’, and views towards the outlook on Coronavirus and the global economic outlook. Certain types of currency like safe havens such as the US dollar, Swiss franc and Japanese yen will strengthen when the outlook is poor, in response to investors seeking to shield themselves away from risk elsewhere.
Riskier currencies, including commodity currencies like the Australian dollar, New Zealand dollar and Canadian dollar will generally fall in value when the market sentiment is low. This is because their commodity-based economies may perform badly when there is less international demand for their commodities and exports.
Sterling sits loosely in the middle of this range, not considered a safe haven, but not a riskier currency either. It has however in recent years become more like a riskier currency, based on uncertain political and economic situations. This helps explain why sterling has been performing badly because of the Coronavirus, not just because of poor economic data for the UK but also because future economic health for Britain will depend on a healthy global economy.
This pattern is not always guaranteed but has been more and more identifiable in recent weeks reflecting the UK’s reliance on the world economy to be doing well, in order for the British economy to have strong demand for its services economy from overseas. This plays such a big role in contributing to the strength of the UK economy.
A good example of this was following the oil price crash on Tuesday which saw the pound drop over 1% against both the euro and US dollar. The negative prices seen of West Texas Intermediate (WTI) reflected a major oversupply of oil in the global economy, and the market reaction reflected the concern over the damage being done by the economic slowdown in place throughout the world.
Sterling has rebounded from these lows, with the focus back on Europe and the US after some key pieces of economic news were released yesterday for these regions. Today, UK Retail Sales was negative as expected, with month on month data for March showing a decline of -5.1% for consumer spending.
Sterling is currently trading against the euro at 1.1443 and the US dollar at 1.2315 on the interbank rate, please contact us to learn more about what is driving the pound and will influence the value of your currency exchange.
The euro began the week in a slightly more upbeat mood after moves last week to help establish greater access to the European Stability Mechanism, a bailout fund for struggling Eurozone nations. Much of the euro’s performance has been linked to the fears over how struggling indebted nations like Italy and Spain will be able to successfully recover from the effects of the Coronavirus and the economic malaise.
Across Europe, national lockdowns have seen countries grinding to a halt and whilst there has been some gentle easing of restrictions, the lockdowns are still in force and preventing much economic activity. Yesterday the Eurozone posted some poor Purchasing Manager’s Index data with Services data posting a record low of 11.7, on a scale of 1 to 100 where anything below 50 represents contraction.
Sterling did recover against the euro towards the end of the week following these data sets but the bad news in Europe is also bad news for the UK, since the UK relies so much on trade with the EU. This helps explain why, despite many worries for the Eurozone, GBPEUR exchange rates have not seen huge advances. The UK relies heavily on trade between the Eurozone and even with the UK leaving the EU, the two economies are and will still be very closely linked.
The main concern in Europe stems from how individual countries will be able to fund the recoveries without getting into a worse predicament. And because of the way Eurozone debt is structured, individual countries issue debt themselves meaning each Eurozone nation pays a different price. Italy pays a lot more to borrow than Germany, a key bone of contention between the nations.
Towards the end of this week, the euro also suffered following admissions from key Eurozone leaders over the economic outlook, and an apology by Ursula Von De Leyen, President of the European Commission that not enough was being done to help Italy.
Whilst a greater recovery fund is being drawn up, there are still some critical details over the financing of the fund and conditions of access to be finalised. Any signs of progress being made on this topic might help the euro to rise whilst continued uncertainty on this topic has seen the euro weaken.
The US dollar has continued to act as a barometer of sentiment over the coronavirus, displaying its usual safe haven qualities, rising when it appears the global situation is getting worse, and softening in value when progress is being made.
For most currencies negative economic news would see the currency weaken, with the US dollar though, poor economic news can see it rise in value as investors choose the still relative safety of the greenback versus possible risk and uncertainty elsewhere.
Yesterday, the headline number on Jobless Claims continued to be a key driver of sentiment, this combined with the scares over the price of oil earlier in the week, all helped see the US dollar retaining much of its form.
Unemployment is predicted to rise to anywhere between 15% and 20%, as 26 million Americans have now filed for Jobless Claims. Unemployment is a key piece of data used by the US Federal Reserve in their decisions on interest rates, and whilst interest rates are at record lows, a worsening economic situation will be a real headache for policy makers.
The United States continues to be one of the worst effected countries with over 50,000 deaths and great concern over the measures being taken to combat the pandemic. Political uncertainty is growing, which is important in an election year. In six month’s time the US Presidential election will be in full swing and the response to Coronavirus and the state of the American economy seem likely to be hot topics.
Against the US dollar, sterling did make a small recovery but much of the movement against the US dollar has been based on the strength of the greenback rather than the pound. Movements on GBPUSD have been very much sentiment related as described above, in that when there are increasing fears over the global economic outlook the dollar rises dragging the pound down against it and other currencies. When there is optimism over progress and a way forward against the pandemic, the US currency has been seen to weaken with sterling rising too.
The US dollar continues to dominate but an ever-changing picture on the Coronavirus is keeping the market on its toes, speak to our team to learn more.
This week, we will take a look at the South African rand which has weakened to some of its lowest levels against the pound since January 2016, this week testing the four-year low at 23.68 on the interbank rate. The rand has been sold off sharply lately by investors owing to the increased political and economic uncertainty in the country.
Despite a bold stimulus package announced this week by Cyril Ramaphosa, the South African President, to provide 500bn ZAR to help alleviate the predicted economic woes ahead, the rand has continued to lose ground.
This is perhaps because South Africa is still at the very early stages of the pandemic and this week the World Health Organisation (WHO) warned that the African continent could become one of the next epicentres. This week saw a 47% increase in the number of reported cases across Africa, from 16,000 up to 26,000.
There is a fear that the figures whilst concerning, are also being under reported and with many African countries having fragile healthcare systems and economies, the negative impact on health could be significant from the pandemic.
GBPZAR has risen 16 % in the last month from the interbank rate of 20.32 up to the 23.68 high seen this week. The weakness on the rand is being exacerbated not just by the factors above, but again because of a stronger US dollar and ‘sentiment’ on the currency markets.
USDZAR appreciated 1% this week, with the rising dollar weakening the rand against other currencies too. The US dollar is very much leading the market response to the Coronavirus rising and falling on the global outlook. With the US dollar a safe haven currency and the rand termed a riskier commodity currency, the large movements in opposite directions are reflective of the increasing uncertain outlook for Africa, compared to the rest of the world.
The South African economy relies on exports of gold, diamonds, other precious metals and foodstuffs throughout the world and with great concern over the global economic outlook, the currency has been sold off as investors are also nervous over future demand for their exports.
For more information on ZAR and what might lie ahead for any rand currency transactions please speak to our team.
Fantastic service by Jonathan and his team. I feel totally confident in using the service for my foreign currency transfers.
Phone answered quickly and efficiently. Although not available at the time Jonathan Watson returned my call in France very quickly. Business conducted quickly and in a customer friendly and informative manner at all times. All follow up correspondence and confirmation execute speedily & efficiently.
A stress free experience with friendly, helpful staff. Quick transfer. I would definitely use them again. Quick and reliable.