Sterling’s recovery from its Thursday low of 1.2266 saw the GBP to USD exchange rate accelerate beyond 1.2400 during Friday’s trading and at one point reaching beyond 1.2450. The market’s risk-on mood saw investors move away from the safe-haven US dollar, allowing the pound to recover the near 2 percent loss it had made earlier in the week.
The pound had incurred a difficult week as coronavirus, negative economic data, and Brexit uncertainty all weighed heavily on the UK currency. However, investors are encouraged by the relaxing of current lockdown measures, hoping that a global economic recovery may be quicker than expected.
In addition, the eagerly awaited US Non-Farm Payrolls showed a better number than expected, contributing to the upbeat mood in Friday’s trading. There were also reports that the world’s two largest economies, the US and China will continue work on their trade deal this week, hopefully putting an end to the 2-year war, further boosting investor’s optimism.
UK’s Likely Lockdown Extension to Stall GBP to USD Gains
Prime minister Boris Johnson is widely expected to extend the UK’s lockdown until June, putting the UK economy behind that of the rest of the world, as other nations in Europe, as well as the antipodean and northern American countries look to ease back considerably more from the strict lockdown measures that have been in force.
The prime minister will ask the country to “stay alert, control the virus and save lives” as he reveals the new coronavirus approach as part of his roadmap to economic recovery. It is believed that the government will encourage those who cannot work from home to return to work, albeit with strict social distancing rules to be observed.
A new 5 tier warning system similar to the one used to publicise terror threat levels will be implemented, with level 1 being green and level 5 being red. It is thought that Mr Johnson will say that the UK is close to moving to level 3 from level 4, indicating the infection rate is not increasing significantly. The government will monitor local areas more diligently and some regions could see different restrictions to others if there’s a spike in infections.
The government will publish its 50-page roadmap later today, at the same time it is confirmed to MPs. The government will likely proceed with maximum caution, particularly after coming under global criticism for its handling of the crisis thus far.
Brexit Uncertainty to Keep Pound to Euro Under Pressure
It does not appear the UK government is approaching the Brexit negotiations with a real intention to succeed. Michel Barnier vented his frustrations at the last round of talks, at the UK’s lack of will to extend the transition period or to compromise on the key issues. Phil Hogan, the European Trade Commissioner said, “My perception of it is they don’t want to drag the negotiations out into 2021 because they can effectively blame Covid for everything.”
Last time, investors suspected the UK may exit the European Union without a formal trade agreement, the pound to dollar rate and pound to euro rate plummeted to 1.20 and 1.05 respectively. The current talks are barely 3 rounds in and have effectively stalled as the European Union pushes for an extension to the current transition period and the UK insists it be treated as a sovereign equal at these negotiations.
The UK has refused to discuss an extension of the current transition period, currently due to conclude on 31 January 2021 and the European Union is adamant the UK complies with its “level playing field” demand. The negotiating teams have until the end of June to confirm an extension. Thereafter, the UK would exit the European Union early next year with or without a trade deal.
This scenario would heap pressure on both parties for the latter part of the year as they battle to come to an agreement, meanwhile heaping further pressure on the UK economy, which is already experiencing the worse financial crisis of a lifetime. However, economists have always predicted a sharp short-term impact to the UK economy and longer-term growth being tapered due to Brexit, but given the current economic crisis, any damage from Brexit may be difficult to register as the UK would likely be on an economic rebound by early next year.
The pound to euro rate gained more than 1 per cent last week and is now trading above 1.1400, but this is less than a 0.1 per cent increase on one month ago. GBPEUR has remained rangebound for some time with the currency pair rarely extending beyond 1.1500 or below 1.1300.
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