The pound hit the headlines yesterday labelled the “worst performing currency in May” by the Financial Times, as it slipped to the bottom of the performance tables of the G10 countries. The reason for the decline has been a combination of the health and economic impacts of the Coronavirus on the UK, the Bank of England’s response to these situations, and some good old uncertainty over a no-deal Brexit.
The pound to Euro interbank rate hit 1.1152 at its lowest yesterday, its lowest since the 30th March seven weeks ago. Meanwhile on pound to US dollar interbank rates it is a similar story, with the rate hitting 1.2079, its lowest since the 27th March. GBPEUR is still trading in the 1.11’s this morning whilst GBPUSD has rebounded back over 1.22 due to a weaker US dollar.
This morning, we have had breaking news following the latest UK Unemployment data which has shown a reading of 3.9% versus the 4.4% expected, although this only cover the rolling three-month period to the end of March, just as the lockdown started. With April the first full month of lockdown, it might be next month’s data that includes April which carries more weight. What was concerning from this morning’s data was the surge in the UK Claimant Count, which rose by 856,500 rather than the 150,000 expected, taking the number of people claiming benefits to over 2 million.
To determine where the value of the pound might be headed, it is always sensible to keep an eye on commentary from the Bank of England. Silvana Tenreyo, an external member of the MPC (Monetary Policy Committee), has been quoted as saying that ‘negative rates have had a positive effect’. Could this mean possible negative rate considerations by the UK’s central bank? As reported by the Times, we know Andy Haldane, The Bank’s Chief Economist has said it is a possibility. Were the UK to seriously consider negative rates ahead it would not be surprising for the pound to come under further selling pressures.
There was some more upbeat news yesterday on a potential vaccine for Coronavirus with Moderna, a US drug company hailing some trials where patients displayed a positive response. AstraZeneca, a UK firm had also said that they would be able to distribute 100 million vaccines by the end of the year, with 30 million available to the UK. It has been this news that has helped the US dollar to lose some ground, since as a safe haven currency, the US dollar can weaken when financial markets have more confidence and investors ‘sell-off’ their safe haven positions and seek more exciting and potentially profitable shores elsewhere.
Later this morning we have Eurozone construction output data as well as the German ZEW sentiment survey, all with potential market moving potential for GBPEUR rates. The ZEW sentiment survey for Germany is a closely watched reading of economic sentiment and is predicted to show a small rise in confidence for the German economy, which might therefore possibly help the Euro.
There has been more positive news from Europe too with both Italy and Greece’s comments over the weekend that they would be looking to reopen to tourists this summer. Pound to Euro exchange rates have been trading lower with interbank levels having dropped 3% since the beginning of the month. Whilst bad news for Euro buyers, this is good news for Euro sellers who are now getting an extra £2800 for every €100,000 that is sold back to buy pounds, looking at the interbank rate high to low this month.
The Euro has often found itself on the wrong side of economic uncertainty with investors fears over Eurozone debt and the recovery from the Coronavirus effects a concern. Having said that, Europe has made headway in its plans to tackle the crisis with lower number of cases being reported and many countries easing restrictions and gently coming out of the lockdowns.
Yesterday, Germany and France also made a joint call for a €500bn EU Recovery Fund, in a sign of a more coordinated move designed to aid struggling countries, but to also perhaps neutralise much of the recent criticism that had seen the Euro losing value.
This afternoon is the latest Housing Starts data for the United States with some market moving potential. The US has been the country most affected by the Coronavirus with over 1.5m cases and 90,000 fatalities so far. There has also been increased political concerns over the US response to the virus, with protests and Trump coming under fire for his response. We have also had increased tensions with China, as the US has sought to apportion blame. Yesterday, Mike Pompeo was quoted as saying China was a ‘danger to the free world’.
This is an election year and Trump is doing his best to get re-elected, the Coronavirus was not part of the plan. Joe Biden is leading the polls with 51.43%, versus Trump on 42.37% of the popular vote. However, this is by no means representative of the result since Hilary Clinton also led Trump in many of the previous polls before the 2016 election.
Joe Biden is standing on a radical left-wing platform to woo voters ahead of the November 3rd date. I would expect the topic of election to become more important in the weeks and months ahead, the potential for a shift from ‘Trumponomics’ to ‘Bidonomics’ could trigger some changes in the US economy and sentiment on the US dollar and other currencies.
Tomorrow morning, we have further news on the UK economy with the latest Inflation data which may have the potential to move sterling rates. And for the rest of the week ahead we have the latest PMI surveys for the UK on Thursday. These preliminary estimates of economic activity within May could prove to be market movers for sterling, as we saw the previous releases of this nature in April and March trigger volatility for the pound.
Friday contains two key releases with UK Retail Sales and then Public Sector Net Borrowing. Retail Sales is predicted to show a 16.5% decline for April which when you consider how important consumer spending is for the UK economy could prove vital for the pound.
For Government borrowing, expectations are for an increase to £35bn, which in representing such a big change in government commitments, could prove challenging for the pound as well.
Overnight we have had the RBA, (Reserve Bank of Australia) interest rate decision Meeting Minutes, where it has been reaffirmed that the Australian central bank is still in a wait and watch mode. The Australia dollar has been getting stronger against a weaker pound. GBPAUD interbank rates are the lowest now that they have been in 2020 at 1.8662, presenting the best time in 2020 to sell Australian dollars for pounds, according to this measure.
Essentially, Australia appears to be coming out of the crisis faster than many countries including the UK. Their much lower number of cases and ability to get the economy moving again is giving investors confidence to back the currency, and further signs of a gulf between Australia and the rest of the world may lend further support to the currency.
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