IFX Market Report: Wednesday 13th May 2020

The pound endured a torrid day yesterday, falling to a 20-day low. This has been caused by a combination of confusing government output concerning lockdown easing and fresh Brexit concerns.

Investors are unsure that the UK will leave the EU with a deal by the end-of-year deadline, as Britain and the EU commenced their penultimate scheduled round of trade talks via teleconference this week, having made little progress previously. Meanwhile, the country’s debt mountain exceeds $2.5 trillion, with public sector net borrowing set to pass 14% of gross domestic product this year, the biggest single-year deficit since World War Two. This reinforces the economic impact of the pandemic, likely leading to the worst recession in 300 years and affecting confidence.

Late yesterday, the UK announced an extension to its job retention scheme, in which the government pays 80% of furloughed workers’ wages, by another four months until the end of October. Analysts estimate it will cost the government billions to fund this scheme and it appears to contradict Boris Johnson’s recent statements regarding plans to get the workforce back to business.

Bank of England Governor, Andrew Bailey, is due to speak later this morning.

GBPUSD opened at 1.2327 and declined to close at 1.2272

GBPEUR opened at 1.1394 and lost significant ground, closing at 1.1310

In the US, data yesterday showed that US consumer prices dropped 0.8% in April, the biggest fall since the Great Recession. There is now increasing speculation that the country could adopt a negative interest rate policy, with President Trump yesterday pushing the Fed to do just that. Fed Chairman, Jerome Powell, will address this in a speech later today.

Until now, Fed officials have said they do not see a need to cut interest rates below zero and market players expect Powell to stick to that rhetoric. Whilst the greenback has made gains versus a weaker pound, it lost value against the euro yesterday.

The euro has failed to generate any headlines recently, but has benefited from a weaker pound and a wavering US dollar. Having been tightly rangebound for some time, euro sellers should now be looking to take advantage of the comparatively major gains that the single currency has made this week.

EURUSD opened at 1.0818 and rose to 1.0877, closing at 1.0850

In other news, the New Zealand dollar has lost around 1% in value after the central bank expanded its asset purchase program to NZ$60 billion from NZ$33 billion, while its policy minutes gave negative interest rates as a future option.

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