The U.K officially entered into a recession this morning, which has come as no surprise to investors and speculators and has not had a huge impact on sterling exchange rates in early morning trading.
News hit the wires shortly after 07:00 that the U.K economy shrank by 20.4% in quarter 2 (April-June) 2020, which following on from a decline of 2.2% from January to March means that we are officially entered into a recession.
To officially enter a recession an economy has to have two consecutive quarters of negative growth but will only need one positive quarter to officially be back out of it. Unfortunately with the pandemic still tightly grasping the world as it stands it does seem like it may be a while before we see the U.K come back out of a recession but there are small signs of positivity, like the June figures showing a month on month improvement so its not all doom and gloom.
Whilst we have no vaccine and continue to hear and see signs of a second wave being possible it is likely that the U.K economy and many others around the world will continue to struggle to gain good traction, looking back historically when the first wave of the pandemic started to show signs that it would grip the world tightly we did see Sterling exchange rates drop fairly significantly so this is something to be cautious of if you have a larger foreign currency purchase coming up for your business or should you be buying a property overseas.
Unemployment figures released on Tuesday saw the largest rise in unemployment since May 2009 with 220,000 people losing their jobs, the unemployment figure remained at 3.9% but there are growing concerns that we may see this significantly rise once the furlough scheme starts to unwind.
On top of this, those that are furloughed, on temporary leave or zero hours contracts with no work currently are not included, so there real figure is likely to be a great deal higher than is currently on record, which is not good news for the U.K economy either.
Brexit News Important for Where Sterling Exchange Rates Head Next
Positive Brexit news is still likely to be the key to a Sterling recovery of any significance and talks are continuously ongoing to try and get a landing zone involving both sides having to compromise and meet in the middle.
David Frost, chief Brexit negotiator on the U.K side is actually due to take on a new role in September as the National Security Advisor, which is quite surprising given that there is currently no deal forthcoming and the clock is well and truly ticking. Apparently he has suggested he will continue to oversee the talks before stepping away, some commentators are seeing this as another move from Boris Johnson to show a strong hand and try to get the wheels in motion but others are concerned that this will not help the talks in such a crucial time.
Should talks continue to stumble then it might start to put pressure on the pound in the coming weeks, but any breakthrough and progress could see a significant uplift, I would not be greatly surprised to see some positive news come from the talks in the next two months, with neither side suggesting they don’t want a deal and also with even the bare bones of a deal needing to be in place well in advance of the December 31st deadline as there will be a lot of work to do to prepare.
In terms of economic data we don’t have a huge amount of Sterling focussed economic data releases due to coming out for the rest of the trading week, so it is likely the focus may be on general market sentiment, Brexit news and also any signs of an increasing chance of a second wave of the pandemic.
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