Entering the new trading week, last week saw GBP’s fourth consecutive weekly loss against the euro. The GBP/EUR exchange rate fell below a key technical support level on the charts and has undermined the multi-month uptrend in the pound to euro rate, which will expose the rate to the risk of further declines up ahead. Meanwhile, Italian officials noted that the Lombardy region of Italy has entered a state of quarantine in a move to try to control the spread of the coronavirus. Markets are set to react to the move at the start of the week, something which could pile pressure on the ECB. Nevertheless, the euro continues to benefit from ‘carry trade’ bets which sees the pairing enter trading today below the 1.1614 level, undermining the post-summer uptrend and potentially setting up GBP for more losses in the future.
Battered GBP suffers blows from EUR gains
Friday’s daily close of below the 1.1614 level left the pound on the back foot as it entered the new week. 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 risk aversion 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 as investors pondered the impact that the coronavirus is likely to have on the global economy. For the pound, Wednesday may be the best chance it gets to recover as the UK Treasury announces its fiscal policy up ahead in order to combat the impact of the virus and stimulate the economy.
Italian lockdown set to affect both currencies this week
With Italy being one of the UK’s top ten trading partners, the news that 17 million of its residents being put into quarantine will not do the struggling GBP currency any favours with investors. The containment measure is like that introduced in China which saw the Chinese economy come to a standstill, the market is concerned that this could be Italy’s fate also, which was an economy already in the midst of a recession.
Meanwhile, the euro could be affected by the Italian move as markets begin to price up the damage that the quarantine will cause to the Italian output statistics in the months ahead. With travel limited, business will likely take a hit in the country which will be reflected in the Eurozone’s and Italy’s economic figures. Should the nations statistics dwindle, the ECB is likely to face further pressure.
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