The pound fell sharply yesterday despite the UK economy now slowly starting to reopen. Rates hit a low of 1.1292 for GBPEUR this morning.

UK Gross Domestic Product numbers released this morning for Quarter 1 fell by 2%, the worst since the Financial crisis of 2008 and noticeably a stark drop in the month of March. UK manufacturing and industrial production numbers also released this morning took a big knock at -9.7 and -8.2 respectively. Future GDP releases will likely carry enormous weight for the pound.

Warnings have been made that Britain faces its worst recession for three hundred years which takes us back to 1709, the year of the great frost. The Bank of England has indicated there may be a plausible 14% fall in GDP this year.

Uncertainty as the Markets Await a Result on the Vote

UK Lockdown Easing

This week marks a milestone with changes introduced allowing some businesses to reopen with the manufacturing and construction sectors leading the way. Toyota is recommencing production at one of its UK engine plants today. Those craving a Big Mac meal will be able to visit any drive-through restaurant in early June and garden centres will reopen from today. The furlough scheme will also be extended until October and the pound is likely to respond to how well these measures are received and crucially whether they prove successful.

In a sign though of the lasting damage coronavirus may have on the UK economy the Bank Of England’s chief economist Andy Haldane has said that the pandemic will leave scars as businesses are saddled with more debt and households worry about their job prospects and  cut back spending even after the virus is under control. He added, “All crises leave scars and this crisis will be no exception.” The Sunday Times has reported that in some lockdown exit scenarios using different models, the death toll in the UK could be in excess of 100,000.

UK-US Trade Talks Commence

Last week saw trade talks commence between the UK and US in the hope of achieving a free trade deal which could give a £15 billion boost to the British economy. These US trade talks are taking place in parallel with EU talks to achieve greater leverage in the EU negotiations. The Sunday Times reports a skeleton deal with the US could help get a better deal from the EU.

The Brexit negotiations could become fraught especially as plans are being drafted to bypass the port of Calais and develop other UK ports along the East coast. Covid-19 has highlighted the UK's dependence on imported goods including PPE. The battle of the fisheries is yet to be fought and there is an awareness by the UK government that strikes by French fishermen have previously blocked Calais which is notorious for industrial action. It is expected that June is the time when it will be known whether a deal can be reached ahead of a decisive EU summit and whether to extend the transition period. The fourth round of talks resume 1st June and high volatility for the pound could be seen depending on the outcome.

Eurostat announced last Friday that the eurozone economy shrank by 12.1% in the second quarter of 2020 compared to the first quarter. This is the biggest drop on record.

Germanies R Count Jumps After Lockdown Easing

Germany, which was one of the first countries to start easing lockdown measures, saw a jump higher in Covid-19 cases with the Reproduction rate (R) climbing to 1.07 on Monday before falling back down to 0.94 yesterday. Anything over 1 demonstrates that the number of infections is growing and it comes as a disappointment considering Germany did have the R rate down to 0.7 before lockdown measures were eased two weeks ago. Karl Lauterbach, professor of epidemiology has said there will be a return to exponential growth of the virus in Germany. Any deterioration in the EU economic outlook due to Covid-19 could see further Euro volatility.

Spain yesterday introduced measures to quarantine international travellers for two weeks starting from this Friday. Those looking to go to Spain on viewing trips or visit holiday homes will only be allowed out for food shopping, health purposes or ‘situation of need’ for that period.

Division Amongst EU Nations on Funding

In a sign of how fraught discussions may become between EU member states it has been reported that Germany has accounted for 52% of all state aid approved by the European Commission in relation to Covid-19, which is double its share of the EU economy. It has raised concerns that unequal funding poses a risk to the single market with poorer countries such has Spain calling for a fairer system. There are concerns that the Northern countries could come out of the crisis sooner than the poorer economies to the South such as Spain and Italy. EU member states continue to disagree on whether EU funding should be provided as grants or loans and political fireworks are likely to be seen in the weeks to come.

EU industrial production numbers are released this morning ahead of important GDP numbers on Friday which could make for an interesting end to the week for Euro exchange rates.

Continuing tensions between the US and China likely to impact USD

US-China Trade Deal

The US China trade war is far from over with new tensions brewing despite Phase 1 of the trade talks being completed at the beginning of the year. Officials agreed last week that the trade deal should remain in place although President Trump had admitted he was “very torn” on whether to uphold the deal.

Tomorrow will see the weekly US initial jobless claims which has proven to be something of a market mover in recent weeks. With US unemployment sitting at 14.7% because of the coronavirus and the highest since the Great Depression, any further worsening in the outlook for the jobs market could see further volatility for the dollar.

Hopes for a V shaped recession in the US are starting to look less likely. Chief economist at ING James Knightley said that “The prospect of a V-shaped recovery is absolutely zero. Getting 40 million jobs returning in the next 12 months? I simply cannot see it happening.”

Fed Chair Jerome Powell will also be speaking later today. Any guidance offered as to further quantitative easing could help move the US dollar going forward.

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