The pound started the week on the back foot, having finished trading on Friday 6th below the 1.1614.
GBP saw significant losses against the euro last week as the single currency continued to benefit from the liquidation of ‘carry trade’ bets on higher yielding assets, which are among the most vulnerable to the risk averse market, stemming from the coronavirus crisis. The losses were assisted by stock markets and commodity prices, which crumbled once again as some major economy bond yields including those of the UK, US and Australia fell to new lows, while investors pondered the impact that the coronavirus is likely to have on the global economy.
Wednesday was to be the best bet for the pound sterling to recover as the UK Treasury was set to announce its fiscal policy in order to combat the impact of the virus and stimulate the economy.
However, before this could happen, the Bank of England (BoE) announced on Wednesday morning that they had agreed to cut the UK’s interest rates by 50bps. This took the rate from 0.75% to 0.25% in the wake of the coronavirus outbreak. The Monetary Policy Committee cut rates, and in doing so took the borrowing costs back down to the lowest level in history. As a result of the move, the central bank noted that it would free up billions of pounds of extra lending power to help banks support firms. But in making the cut, GBP moved lower, which took the GBPEUR interbank exchange rate to 1.1369, the lowest level since October 2019.
Later on during the Wednesday session, the Chancellor of the Exchequer Rishi Sunak announced that £30 billion in immediate spending will be made available to combat the economic slowdown caused by the Covid-19 outbreak. He also stated that an additional £175 billion increase in spending would be introduced throughout the course of the next 5 years.
The market responded to the unveiling of the budget, and the move by the UK had been interpreted by foreign exchange markets as being largely supportive of GBP as it is likely to provide a cushion for the British economy whilst it approaches the two-pronged attack from the challenges of the coronavirus, as well as the ongoing battles between the EU and UK in their trade negotiations.
Towards the end of the week, UK PM Boris Johnson called an emergency Cobra meeting regarding the coronavirus. He noted that the government had deemed the virus serious enough to initiate the next ‘delay’ phase. In making the announcement the UK’s fears heightened, sinking the pound as investors’ jitters become more and more real. Investors will now be looking for the developments from UK officials as the UK PM looked reluctant to close schools like Italy as he noted that it would do more harm than good.
To start the week, European news reported that the Lombardy region of Italy had entered a state of quarantine, in a move to try to control the spread of the coronavirus. Markets reacted with panic at the start of the week, something which piled pressure on the European Central Bank (ECB) considering their upcoming monetary policy decision which was up for review on Thursday. Nevertheless, the euro continued to benefit from ‘carry trade’ bets despite the onslaught from the coronavirus within Europe.
Into the second day of the week, the euro rose against the pound following a response to the outlook for the global economy. The market is predicting a global recession, as nations around the world hinted at their containment efforts. In doing so, these would cause a knock-on effect in both domestic and global economies as GDP figures and economic outputs decrease with a reduced national workforce, restricted travel and a slumping demand of materials and commodities. This news sunk stock markets which only benefitted the euro as investors repatriated their stocks back into euros.
Mid-week saw Germany announced a coronavirus stimulus package. The German government highlighted the package in anticipation of the viral disease affecting the economy. This gave EUR an edge over GBP. The market noted that Germany’s step was one in the right direction, but the plan will only tackle the impact from a short-lived economic shock. The Eurozone’s growth report for the fourth quarter was announced this week, the GDP report showed that the figures had beaten predictions and rose from 0.9% to 1% in the year-on-year figure. However, the euro's performance was held back by growing concerns for the bloc’s economy amid the Italian quarantine following the nation’s coronavirus outbreak. EUR investors were also concerned about the prospect of an interest rate cut from the European Central Bank with the ECB policymakers meeting on Thursday.
Thursday marked the release of the ECB’s interest rate decision; the central bank opted to keep interest rates unchanged at the -0.5% level. However, the ECB did note that further easing is to commence up ahead. The central bank noted that it will step up its net asset purchases by a cumulative EUR 120 billion until the end of the year. The ECB also loosened the conditions on its targeted longer-term refinancing operations (TLTRO) programme. The lending rate can be as low as 25bp below the deposit rate, so effectively a 25bp cut.
The US dollar has taken a beating in previous trading sessions, with the range thus far this year nearly matching all of last year’s total range. With the momentum being observed currently, it is likely that it will end up expanding to the downside and break the 2019 low of 95.03. Something that markets are increasingly concerned about. The past couple of sessions have brought with them support breaks via both trend-lines and price. Conditions are becoming oversold in the US, but not the type that look like they are best faded. Markets are noting that a bounce could be in the wings for USD, but the likelihood of this would be a small bounce, followed by a further thrust lower.
President Trump made an announcement that he will seek economic relief from Congress on Monday, a move which helped lift USD. Economic relief from payroll tax and help for workers has boosted sentiment and eased the heightened fears over the impact of coronavirus on the US economy.US equity futures and US treasury bonds also saw a slight recovery which helped USD pick up from its recent multi-month lows.
After Monday saw significant losses for the US dollar against the Japanese yen, euro and Swiss franc, optimism that central bank policymakers would introduce co-ordinated stimulus measures to combat the economic impact of the coronavirus brought the American currency some support.
The dollar also began to recover after both US stock futures and bond yields rose after US President Donald Trump’s announcement on Tuesday, in which he noted that he would be taking ‘major’ steps in strengthening the American economy against the coronavirus outbreak. However, the market noted that it was too early to call a bottom in the dollar after plummeting oil prices saw the largest decline in almost 30 years at around a 30% drop.
Towards the end of the week, President Trump announced that the United States has announced a ban on travel from Europe into the US (excluding the UK). A move which has heightened coronavirus fears globally.
Heading into the second day of the trading week, the GBPAUD interbank exchange rate broke through the 2.0 barrier. The struggling Australian dollar was sold off in an aggressive fashion at the start of the week following concerns of the economic impact of the coronavirus. The disruption to the supply chain has played havoc with the Aussie for months, which has negatively impacted the country’s output on the economic front. The pound to Australian dollar exchange rate was quoted as high as 2.0770 in early Asian trading on Tuesday, as markets opened amidst thin liquidity.
Into mid-week, the Australian economy continued to struggle on the global trading markets as the pressure of the coronavirus outbreak weighed heavy on the Aussie currency. The Australian economy was forecast to enter its first recession in 20 years by local lender Westpac Bank. Should this be the case, the Australian dollar is likely to suffer for a prolonged period. Westpac noted that the Australian dollar will likely contract by 0.3% in the March and June quarters in 2020. A range of factors are set to disrupt the Aussie economy in the months to come following the coronavirus fears, with tourism, foreign students and agriculture all set to feel the impact of the virus.
The Australian dollar, as a proxy for global risk sentiment, and for China’s growth outlook, will continue to be limited by the coronavirus concerns. Fragile industrial commodities and the China travel ban threaten each of Australia’s top 5 exports (coal, iron ore, LNG, education, tourism). The mix of coronavirus fears, recession concerns and heavily discounted energy sector paves the way for an underperformance by the Aussie dollar up ahead. However, the future for AUD will largely depend on how the RBA responds to the slowdown, RBA Governor Lowe still have one or two further interest rate cuts at their disposal before unconventional quantitative easing is considered.
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