We are currently in unprecedented times, this situation has never occurred in modern history and so there is little to draw from as to market reaction. What we can look at is where investors move to in times of global economic uncertainty and unfortunately sterling is not considered to be a safe haven currency.
The UK’s imports vastly outweigh our exports and due to this during times of global economic downturn sterling is not the destination of choice. To add to the pounds woes we also have a complete lack of clarity surrounding Brexit, which will further put off investors putting their money in sterling.
At the start of this week’s trading, the pound opened at 1.084 against the euro on the interbank exchange before falling as low as 1.066, as fears of a UK lock-down due to the coronavirus heightened. Since Boris Johnson’s announcement of further restrictions to people’s movement in the UK sterling has made some of its losses back against the euro, so far rising to 1.078 at the time of writing.
GBP/EUR Exchange Rate Weaker Since Coronavirus Spread
We are witnessing sterling weaken as the Covid-19 virus escalates. Thankfully Boris Johnson has taken steps to try and contain the virus through a partial lock-down which could ease investor fears.
The Bank of England has now slashed interest rates in an attempt to help the economy during these uncertain times. There has also been the promise of Quantitative Easing (QE). QE is essentially pumping money into an economy in order to stimulate growth. This should also help liquidity and there is also proposals to make sure private sector workers still receive pay if they are unable to work.
There is the potential for euro weakness ahead as the virus escalates in areas such as Italy, Germany and Spain. Christine LaGarde, Head of the European Central Bank (ECB) has made promises of monetary stimulus in a similar fashion to the Bank of England.
The US dollar seems to be the destination of choice at present. The Federal Reserve has now made the unprecedented move of provided unlimited QE which will no doubt provide confidence to US citizens. Sterling could remain fragile for some time due to both the Corona virus and the lack of clarity surrounding Brexit. It could prove wise to take advantage of current levels.
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