The UK, whilst also being the world’s second worst virus-hit nation only followed by the US, has begun to show further signs of the economic damage.
The disruptive combination of a global pandemic and political meltdown in Brexit negotiations have impacted the UK economy and the strength of sterling. With no progress being made to creating a free-trade Brexit deal in one hand and 250k virus cases with 35,000 deaths on the other, the current state of economic contraction is dire. The UK GDP Q1 figures came in at a disappointing yet almost unsurprising -2%, the worst recorded figures since the financial crash of 2008.
Continuing this difficult time for the UK there have been increasingly repeated statements such as that of UK economist Simon Baptist who stated that there is “virtually zero” chance of a Brexit trade deal being negotiated for 2020. For the most part, Brexit developments have been side-lined by the Coronavirus but whilst this disaster is ravaging the UK economy, depressing Brexit talks which typically induce sterling weakness will affect investor sentiment in the long term. This follows further deadlock between UK and EU chief Brexit negotiators David Frost and Michel Barnier regarding the Irish Protocol and the backtracking of promises made surrounding custom checks and the Irish backstop. As a result, the remainder of 2020 looks set for continued uncertainty both from it economic recovery to a “new normal” working economy and an UK exit strategy that lacks clarity or direction.
The continued doubt surrounding Brexit and the virus, for which the government has come under heavy fire for its delayed attempts at providing sufficient personal protective equipment to front-line workers and not hitting daily testing criteria, has been demonstrated in the currency markets. We have seen GBPEUR rates drop 3.5% from 1.15 mid-market at the start of the month to the end of yesterday’s trading at 1.11 whilst the GBPUSD followed a similar path of 1.26 slipping 3% to 1.223 in the space of 3 weeks. Pound to US dollar trading recently dipped 1.2% in a day on Tuesday to a 4-week low of 1.207 before regaining the lost inroads showing the significant volatility that has been commonplace in recent months.
In more positive news, First Minister Nicola Sturgeon announced yesterday that the Scottish lockdown is set to be lifted next week commencing on the 28th May. This follows England’s reduced lockdown measures which today marks the end of the second working week with little significant spikes in virus cases. Scotland will unveil a 4-stage route map as they edge out of full lockdown protocol which aims to reopen schools in the next academic year starting 11th August. It comes at a time when the Office for National Statistics announced that the number of people with coronavirus remains stable at roughly 137,000 (or 0.25% of English population) at any one time within the last fortnight. Therefore, after promising signs that the peak of the outbreak is behind us, and the rest of the world, other countries are beginning to follow suit in an attempt to bring normality back gradually and alleviate future economic damage.
The Bloc has had an interesting week following Monday’s announcement that Europe’s powerhouse Germany would partner with France to propose a €500bn recovery funds for severely affected EU member states, which may have already been in financial difficulty even before the virus came into fruition. French President Macron and German Chancellor Merkel agreed that the wealth distribution would be presented as a grant rather than a loan which is a massive switch from initial suggestions earlier this month to provide the funds as a loan. Importantly, this means that damaged EU countries do not add to their international debt and could be the needed support these nations need to survive the hard times to come. The proposal provided some well-needed solidarity for the Eurozone in the wake of one of the worst predicted recessions in recorded history. The European Commission had forecasted predictions that the financial toll for 2020 would be a blanket contraction of 7.75% with growth of 6.25% in 2021. This could have be bias from the Bloc to seem more financially confident on the global arena as the Financial Times sees bleaker figures for Europe’s economy to fall more closely aligned with -15% this year.
Regardless, the camaraderie between these EU countries has helped the single currency make significant inroads against the pound and even the US dollar of late with EURUSD experiencing very volatile trading conditions at present. Despite a small blip yesterday, EURUSD sits at a 3-week high in its second peak of the month at 1.095 at the end of Thursday’s trading.
These levels came in despite German GDP for Q1 being recorded at -2.2%, or to put it into context, 10% worse than the UK’s equivalent reading. Being Europe’s strongest economic component, this data release should have carried some significance in the currency market but it seems like a sign of the times when large economic data releases have a null effect on the currency market amidst multitudes of negative economic growth forecasts.
Whilst little economic data is out to affect sterling strength today and for next week, Europe has a little more to show for itself. Today sees European Central Bank’s meeting minutes accompanied by a speech by chief board member Philip Lane regarding the overview or the financial markets and monetary policy insights. Germany then has a sizeable week next week with its finalised GDP Q1 result on Monday and Consumer Price Index (CPI) on Thursday with the Bloc’s overall CPI finishing things off on Friday. Some big releases for volatility here so certainly one to watch for euro investors.
The US is still painting a bleak picture for its remainder of 2020 with fresh reports from the UN and WHO looking to put further pressure on the world’s largest economy. Despite some of the more positive virus statistics that we have started to get accustomed to hearing, the stark reality is that the World Health Organisation (WHO) recorded the worst day for virus cases on record with 106,000 new COVID-19 cases. The UN health agency’s Chief Tedros Adhanom confirmed the results saying that “we still have a long way to go in this pandemic” and besides an increase in poorer countries, many of which are still emanating from the US which tops the global levels at over 1.5mn cases and 92,000 deaths.
US President Trump has come under heavy criticism throughout the duration of the pandemic but is now claiming, in an oddly pitched statement, that it was a “badge of honour” to have the most cases as he boasted that 14 million virus tests have been conducted. However, more recent reports have recently been published by the Columbia University yesterday with the bold caption that if the US lockdown had been imposed one week earlier, it would have saved 36,000 lives. It also goes on to state that 83% of the deaths could have been prevented had the lockdown commenced two weeks earlier. Whilst the finding has as yet to be fully credited, multiple reports are being published discussing the poor government response to the outbreak and could have a significant impact on the US dollar.
Uncertain times, like many other globally traded currencies, are becoming a hallmark for the USD as its safe haven status makes it difficult to ascertain whether it will strengthen or weaken. The US is torn between a potential global recession, which helps the dollar in difficult times, whilst on the other hand the nation could be headed for the largest, most costly recession globally. According to the Financial Times, a predicted 25% of global economic downturn will come from the US and recent reports by Asian Development Bank suggests that the global economic contraction could total £4.7tn which could severely damage the strength of the USD.
Other reports give reason to believe that the US is heading spiralling downwards with 38.6 million jobless claims having been submitted since yesterday with 10 million of them within the last couple of weeks showing the increasing acceleration of unemployment as recorded by the US Labor Department. The publication of this document is set to arrive on Thursday with US GDP Q1 to come later on that day. Without trying to pessimistic, it seems unlikely that any statistics released shedding light on the US’ financial stability could attribute to USD strength, especially considering that the previous 4.8% contraction only took into account a small proportion of the US having just gone into lockdown so this release could carry some weight if announcing a more contracted reading.
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