GBP EXCHANGE RATES CONTINUE TO BE INFLUENCED BY CORONAVIRUS
The COVID-19 pandemic continues to be the main driver for sterling exchange rates and this week we heard from Bank of England Governor, Andrew Bailey, who stated the nation was entering the second phase of the crisis and that the risks were “undoubtably on the downside for a longer and harder recovery”. This, coupled with the recent comments from Chancellor Rishi Sunak who played down the chances of a ‘V’ shaped recovery but instead predicted the UK will face “a severe recession, the likes of which we haven’t seen” are weighing on the sterling exchange rates.
Clearly the UK is not the only economy struggling under the pressures of lockdown and the humanitarian crisis, however, purely from a currency perspective, exchange rate movement as the world recovers from the virus is likely to be driven by the speed of recovery on a comparative basis. With the UK being slower to react than most EU nations for example this may mean that it takes longer for Britain to ease lockdown measures and therefore could cause a longer lasting economic impact which may result in GBP under pressure against the euro and other currencies. So, as lockdown measures continue to be eased and economies begin to work their way back to a new normal, the depth of recessions and the speed of recovery are likely to be the main factors influencing exchange rates. Over the past week we have seen relatively small movement for the pound against both the euro and the dollar as the markets continue to wait and see how this situation unfolds. To have a clear view of this, more reliance could be placed on economic data.
KEY ECONOMIC DATA RELEASES NEXT WEEK
There are a number of key economic data releases due next week and as regular readers will be aware these can have an impact on exchange rates. On Monday the marketing manufacturing PMI is announced with the forecast that the numbers will be in line with Aprils reading of 40.6, with any number below 50 seen as negative. On Tuesday the Reserve Bank of Australia (RBA) announce their latest interest rate decision, while the prediction is that rates will be kept on hold at the record low of 0.25%, the accompanying statement from the RBA could provide some insight into the Central Banks views on the Australian economic recovery as they continue to ease the lockdown measures down under.
On Wednesday the latest Australian Gross Domestic Product (GDP) figures are announced for the first quarter of this year with the expectation they will be revised down to 0.3% as a further sign of the damage the global pandemic is having on the major economies. Finally, on Wednesday we have the Bank of Canada interest rate decision and statement which will give us yet more insight into the Central Bankers views and their latest economic forecasts.
EUROPEAN COMMISSION PROPOSE €750BN RECOVERY FUND
On Wednesday we heard from Ursula von der Leyen, President of the European Commission, who proposed a bailout package to help aid the 27-nation bloc as it continues to weather the COVID-19 storm. The proposed package will be made up of grants from every EU member state and therefore it requires all 27 states to agree to it and considering some of the nations are already burdened with high levels of debt they may be reluctant to sign up to more borrowing. However, von der Leyen stated “this is Europe’s moment” and that to help ensure all EU member states recover, they would require each other’s support. While France and Germany have already signed up other nations including Austria, the Netherlands and Sweden are less keen on having to take on debt to help bail out other nations. The aim is to agree this package in the next 3 weeks which may prove challenging as leaders continue to have to converse virtually. Over the next week any further commentary surrounding this package could impact euro exchange rates. While an economy taking on more debt is rarely seen as positive, the fact this package is aimed at bringing stability back to the single currency bloc, positive progress on these discussions could result in euro strength.
Later today we have the latest Eurozone Consumer Price Index (CPI) figures which will give an insight into price movement. Today’s figures are preliminary numbers for May but they are predicted to show a drop and if we see them come in under the forecasted 0.8% then we could see some pressure on the Euro. This data set is released at 10am so if you would like to be kept informed of the release and its impact on the Euro exchange rate speak to one of our traders today.
EUROZONE INTEREST RATE ANNOUNCEMENT NEXT WEEK
On Thursday we will hear from the European Central Bank (ECB) as they announce their latest interest rate decision. The forecast is they will keep it at the record low of 0%, however the markets will be awaiting eagerly the accompanying policy statement and press conference as this so often provides a clear insight into not only the Central Banks thinking on future monetary policy changes but also their views on how the pandemic continues to impact the Eurozone economy. This statement will be particularly interesting considering it will be the first meeting following the proposal of a €750bn recovery fund to tackle the current crisis.
Also announced next week is the Eurozone unemployment on Wednesday which is predicted to rise 0.3% to an overall reading of 7.7%, however, any figure above this will demonstrate the challenge currently faced by the labour market and could result in euro weakness while a positive reading could bring some support for the single currency.
US BUSINESSES ARE PESSIMISTIC ABOUT PACE OF RECOVERY
On Wednesday the Federal Reserve Bank of America (FED) released their latest beige book which gives an insight into their latest view of the US economy. With the US suffering the highest death toll from the virus and the pandemic still impacting everyday life, the survey of business showed that they were pessimistic about how fast the US economy would rebound following the Coronavirus outbreak. The expectation is that the US economy will contract sharply in the 2nd quarter but according to two members of the FED the economy would rebound in the second half of the year, however not all businesses appear to agree with that sentiment.
Most sectors in the States continue to feel pressure with the leisure and hospitality sectors unsurprisingly the hardest hit. The question will be how quickly lockdown measures will be eased in the States and how fast will the economy recover. From an exchange rate perspective, USD remains a safe haven currency, meaning investors tend to invest in it during times of uncertainty, however, the ongoing strength of the dollar and its status as a safe haven currency will depend to an extent on the US economy rebounding from the pandemic at a similar pace to that of the rest of the major economies.
Therefore, Wednesday’s announcement was not overly positive for USD exchange rates as sterling US dollar interbank rates continue to sit around the 1.2280 level.
US ECONOMIC DATA
Next week sees a raft of US data including the Institute for Supply Managements Purchasing Managers Index (PMI) on Monday, which is forecast to be an improvement on April’s figure but still expected to demonstrate challenging conditions. Also out next week are mortgage applications which will paint a picture of the US housing market, the latest factory orders and the non-manufacturing PMI numbers all of which are released on Wednesday which means we could see some volatility for USD as the data is announced. At the end of the week we see Nonfarm payroll data confirmed which shows the number of people in work outside of the seasonally effected agriculture industry and also the latest overall employment rate which is forecast to rise from 14.7% to 19.8%. A reading north of 20% could really bring some weakness to the Dollar as despite the knowledge that the States have been severely impacted by Coronavirus, having one fifth of the workforce unemployed would demonstrate the challenges of getting the world’s largest economy back to “normality” when the pandemic is over.
Get in touch with a member of our trading team to discuss your upcoming currency requirement, and the tools available to help you limit your exposure to the changing currency markets, or download our monthly currency forecast below to see what’s been impacting rates in May.