26 March 2020: Sterling returns to negative territory

Sterling returns to negative territory

26th March: Highlights

  • Pressure returns as Virus concerns continue
  • Stimulus sees return of risk appetite
  • Not how far, but how long?

Chancellor expected to announce further measures

The pound continues to suffer from market concerns about how the economy will fare once the threat of Coronavirus starts to subside.

The nation has shifted from a ten-year programme of austerity to its most expansive budget for twenty-five years only to find that as soon as it was delivered that budget became obsolete.

The measures introduced by the Chancellor so far to combat the effect of Covid-19 are mostly directed towards individuals who are in employment. There have been calls for the Government to intervene to help companies that are most affected but, in the end, it would be difficult since it will affect the entire nation in some way.

There is one group that remains both self-isolating and now socially isolated. That is the self-employed. There have been 500k new applications for social benefits over the past two weeks with 100k on Tuesday alone. The system is clearly swamped, and today’s briefing will be attended by Chancellor Rishi Sunak who is expected to announce further measures.

Market concerns centre around a day of reckoning that will surely come either later this year or early next. With the economy doubtless in recession, the Government will find a hole in its finances and a rising budget deficit. The level of borrowing required is alarming analysts and traders and has led to Sterling’s continued weakness.

It is impossible to imagine what the economy will look like in a year’s time, but it won’t be a pretty picture.

Data released yesterday showed that core inflation and producer prices fell last month but that is pre-virus and predates the monetary actions undertaken by the BoE.

Yesterday, the pound ran out of steam having rallied to a high of 1.1973, it fell to a low of 1.1639 but firmed to close at 1.1879.

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Stimulus package reduces demand and boost risk appetite

The Federal Reserve and U.S. Administration have demonstrated to the world that they are on the ball when it comes to defending the economy against the ravages of Covid-19. While there has been criticism of the lack of front-line aid to individuals whether workers or those receiving benefits, the monetary and fiscal measures so far introduced have received the approval of the markets.

The volatility seen so far in the dollar index has been mostly the reaction of the market to fears over a scarcity of dollars going forward but as far as the domestic economy is concerned, no one doubts that there will be a contraction in GDP but there is a real possibility that it may not become a recession and if it does, it will be shallow and short-lived.

President Trump’s contention that this will be under control in a couple of weeks and America will be back in business by April has been treated with the contempt it deserves, with many observers looking to New York State Governor Andrew Cuomo as the most direct and concise commentator on the crisis as his state battles with being the most affected state in the country.

Gyrations in the dollar index continue as the market reacts to the myriad of activity that surrounds the dollar.

Yesterday, the $2 trillion package of monetary support was reinforced by a package of fiscal measures agreed by Congress despite the President’s misgivings. This calmed markets somewhat, but the underlying issue remains. Cuomo made a highly salient point that there is no stockpile of respirators that Washington can simply access. They must be manufactured and that is taking time.

The calming effect of the package of measures soon dissipated and the market’s concerns have returned.

Yesterday, the dollar index fell to a low of 100.84 and it has continued to lose ground overnight reaching a low so far (0530GMT) of 100.61

Will virus reaction drive a shift to the right?

The World Bank and IMF confirmed that the Covid-19 pandemic will lead to a global recession later in 2020 but singled out the Eurozone for a special mention. The fact that the economy was weakening prior to the outbreak has been exacerbated, but the measures taken to combat the virus, both socially and economically, will lead the economy into a deep and long drawn out recession.

Market analysts have discounted, to a certain extent, the depth of the recession with a wait and see attitude, but it is the length of the downturn and how it will affect nations who will not receive bailouts as they did, however painful, following 2008/9.

With the Growth and Stability Genie out of the bottle it may prove difficult if not impossible for Brussels to regain a degree of control over budget deficits.

While Germany has also joined the fold regarding deficit funding, it is staunchly opposed, as a matter of national pride, to become involved in supporting or guaranteeing pan-eurozone debt. That means that Eurobonds will not be issued which would carry the joint and several guarantee of each of the 19 eurozone members.

It is entirely possible that the recession could last well into next year, possibly for the entire year. The market is considering the worst and is pessimistic that the Central Bank has the will, or the tools, to perform sufficiently radically to slow any downturn.

Yesterday’s data was a little less concerning than the previous day’s activity indexes. Each aspect of the ZEW index fell but not so far as to be alarming.

The single currency saw gains on the back of dollar weakness. It rose to a high of 1.0894, closing at 1.0888

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”