The pound fell sharply during yesterday’s trading as multiple pressures built on the UK currency. The pound to euro exchange rate is now trading at 1.1280, and 1.2189 against the US dollar, compared to 1.1460 against the euro and 1.2380 against the US dollar one week ago. Brexit trade negotiation uncertainty, Bank of England policy, and the UK’s slow exit from lockdown have all weighed on the UK currency.
The pound had been holding firm but since the Deputy Governor of the Bank of England said on Tuesday that more stimulus would be needed and that the bank would be looking at all policy tools, markets have begun to focus on UK specific problems. Deputy Governor Broadbent confirmed that the bank is prepared to do what’s needed, suggesting the bank will intervene when as soon as necessary. However, it is unlikely there’ll be a further cut in interest rates as Broadbent said a cut into negative territory could do more harm than good. Markets now expect the bank to increase its quantitative easing at next month’s meeting.
Markets will also increase focus on the UK’s exit plan from the current lockdown and the UK-EU trade negotiations, neither of which have been going particularly well. German Finance Minister Heiko Maas said “A hard Brexit is becoming increasingly likely, as negotiations between Britain and the European Union have stalled”. “It’s worrying that Britain is moving further away from our jointly agreed political declaration on key issues in the negotiations,” Maas said.
The UK and EU are in their final round of current talks, which are focussed on reaching a provisional deal, in advance of the European Council meeting in July, at which it must be confirmed if an extension to the trade negotiations can be granted. However, the UK has refused to consider the possibility of extending the negotiations and if there aren’t signs of improved sentiment by Friday, the pound will come under further pressure.
UK GDP falls sharply but economists warn there’s much worse to come
The UK economy fell sharply in March, contracting 5.8 percent, and that included barely 1 week of shutdown, which begun on 23 March. The Office for National Statistics confirmed the economy contracted 2 percent in Q1, which was marginally better than expected but still its worst performance since the financial crisis.
However, this is only the tip of the iceberg, with April’s reading expected to be catastrophic. Some sectors of the UK’s heavily driven services industry such as travel, and accommodation felt the squeeze more than others as they were battered by the lockdown. The government’s roadmap to exit the lockdown is now more important than ever as it looks to ease measures and provide support packages.
Capital Economics’ Senior UK Economist Ruth Gregory said GDP could crash by as much as 20 percent in April and the Bank of England has been even more gloomy with their forecast, pencilling in a 30 percent contraction for the first 6 months of the year.
Chancellor Rishi Sunak has confirmed that the government’s furlough scheme, which is paying millions of workers to prevent redundancies, will continue until October although withdrawal of the scheme will be crucial to the UK’s economic recovery. As more time passes, the prospect of a “v-shaped” recovery is becoming less likely with many economists now not expecting the UK to return to pre-Coronavirus levels until 2022.
Even when businesses do reopen, it will take a while for confidence to resume. Both the public and businesses will proceed cautiously until the virus poses little danger, a situation that could take some time to reach.
GBPUSD sinks to 5 week low
GBPUSD has dropped below 1.2200, sinking to its lowest level for 5 weeks. A miserable day for the pound to dollar was only made worse by Federal Reserve Chairman Jerome Powell rejecting negative interest rates. Powell pointed towards the need for further monetary easing but said that negative interest rates were not being considered. The safe-haven dollar was also boosted by comments from Dr Anthony Fauci, one of America’s leading medics on the US’s coronavirus taskforce. Fauci warned that there could be unnecessary death and suffering if lockdown measures were lifted too early. In addition, the Senate’s advance to punish China for its mismanagement of the Coronavirus also hiked up concern as tension remains high between the world’s two largest economies. With the UK experiencing multiple downward pressures and global uncertainty causing a lack of risk appetite, the pound is likely to face a tough time against the US dollar over the coming months.
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