Rising COVID cases within the UK have left its mark on sterling as yesterday saw the currency fall across the board against most of the G10 currencies. GBP/EUR rates had been one of the worst affected pairings, having lost 2 cents from the same time last week where rates hit a peak of 1.1750.
The last 2 months have seen a very stagnant market with this pair typically residing in the 1.16 range, but the recent events represent one of the sharpest movements witnessed this summer.
It seems a long time coming considering that the UK’s Delta variant numbers have skyrocketed in recent weeks with many considering that the dubbed 19th July “Freedom Day” should have been delayed. With COVID daily cases tipping more than 50,000 and many health experts claiming this could escalate to 200,000, there is scope for this sterling weakness to continue.
GBP/USD wasn’t painting the pound in a positive light either as the days of 1.40 and beyond seem a distant memory with rates testing the 1.35 barrier – levels not seen since last January.
However, the highly infectious delta variant is spreading everywhere not just the UK. So why is the pound so affected by this news? This can be taken into 2 categories. Firstly, the UK’s Track and Trace App has been making headlines as the “Pingdemic” with many companies struggling to keep their offices and shops open as a result of staff shortages who are self-isolating having been in close proximity to someone with COVID-19. This has ramifications for the UK economy because if companies are operating at reduced capacity and thus revenue decreases, the economic recovery from the recession that coronavirus brought on will be slower and could create knock-on effects such as increased unemployment.
The other factor is that of the nature of the pound itself. Sterling is a commodity currency and is very volatile in comparison to the likes of the US dollar. This sensitivity can be mean that any negative news can bring about sudden large movements for the currency in question. Likewise, the pound can also strengthen quickly but there hasn’t been much market data available to do this. Friday brings about the only important data release for the UK in the form of the markit services PMI (Purchasing Managers Index) which is expecting a marginal decrease. Following that, there are no releases next week which could have a lasting impact on exchange rates.
Similarly to the UK, market data is light on the ground this week. Whilst overall the EU PMI is expecting to remain roughly the same at 60 where anything above 50 is positive, the UK’s recording is predicted for 64 and Germany’s is expecting to slip 1 point. Part of this movement could be based off of the extreme flooding that much of central mainland Europe has experienced recently and may hamper financial activity within the bloc.
Some more significant releases will also arrive for the single currency with Thursday bringing the ECB interest rate decision. Whilst the European Central Bank have expressed their plans to keep rates on hold at 0%, any suggestions by head bankers of market and sentiment changes can have a significant impact on rates depending on the bullish or bearish outlook. The bears may be winning when it comes to GDP forecasts though. Next Friday will see GDP Q2 released and current expectations are a decline of 1.8%. Since GDP is an overall indicator of economic health, any indication that the eurozone is heading back towards a recession could be really damaging for the euro.
This would be bad news for EUR/USD buyers as the pairing which only 2 months ago was sitting at a peak in the 1.22’s, would now be looking at levels at 1.17 with the propensity to drop further. As a like-for-like comparison, this would mean a 200,000 euro exchange would now return US$10,000 less if it was converted at current levels.
Whilst commodity currencies such as the pound are fighting an uphill battle with a globally reduced risk appetite, this is where safe-haven currencies such as the US dollar find solidarity in uncertain trading conditions.
It is worth noting for clients more recent to the currency markets that last year in March when the world was fully announced that coronavirus was a global pandemic, the GBP/USD currency pairing dropped from 1.30 down to 1.14 in the space of just a week. A 14% drop in value when you are looking at buying or selling property can make an enormous difference on how much you have to pay. Now whilst it is unlikely that we will see market volatility as sizeable as that in the near future, it does highlight the effects that market uncertainty can have on a pairing.
With that in mind, clients who are considering buying US dollars may find themselves having to fork out more money in order to purchase the same amount should market conditions continue in this fashion.
US dollar strength could also continue even despite the fact that their Canadian neighbours have overtaken them in overall vaccination provisions. This can be emphasized in next Thursday’s GDP Q2 announcement. 6.4% was the previous recording and market analysts are now factoring 7.9% to be the more accurate figure. As mentioned in the euro section, the bloc is expecting a contraction whilst