Pound starts week on the back-foot
Pound continues to rally
The Pound continued to rally last week, hitting a fresh high of 1.1441 against the Euro on Thursday, maintaining the upwards trend seen since rates bottomed out on the 19th March. If the Pound is going to see further consolidation then it will be largely down to the overall performance of global markets which is currently a crucial driver for the Pound since the Coronavirus outbreak started. The huge monetary intervention by the US Federal Reserve last week has helped to stabilise markets and this has resulted in Sterling clawing back much of its recent losses. Despite the positives the Pound did end last week slightly lower versus the Euro at 1.1354 and lost almost 1% on Friday against the US Dollar, closing at 1.2268.
The Pound has started this week off on the back foot with news that Prime Minister Boris Johnson has been admitted to hospital with COVID-19, however reports say the Prime Minister was admitted on the advice of his doctor and that the move was purely precautionary which has helped stem any further losses for the Pound. If we were, however, to see any deterioration in his health then the political uncertainty could weigh on the Pound moving forward this week.
Euro on the defensive
Some major European nations are beginning to plan how best to remove some of the lockdown conditions currently in place without risking a wave of new infections. Committees have been set up in France, Spain, Belgium and Finland to explore the gradual easing of stay-at-home orders for some businesses and schools. Meanwhile, Spain extended their shut down for a further two weeks, but the Prime Minister said that a ban on all non-essential work would be lifted after Easter.
There was a generally calmer tone to the action on financial markets last week. Overall though, a risk averse mood still overhangs proceedings. On the currency front, the Euro found itself on the defensive last week, falling by 2-3%. There is no one reason behind this. However, concerns over the ability of the region to deal with the economic fallout from the coronavirus has created an unhelpful backdrop for the currency. EUR/GBP has moved down from near 90p to 88p and the weaker tone to the euro is reflected in EUR/USD starting this week down at the $1.08 threshold. This compares to the $1.11 level it was at a week earlier.
Tomorrow’s meeting of Eurozone Finance Ministers, which is due to discuss debt financing to mitigate the impact of the coronavirus, will be closely followed by market watchers. Elsewhere, the scheduled releases in the Eurozone are of limited interest as they pre-date the onset of the coronavirus and the ECB will publish the minutes from its March meeting. The minutes will be looked to for any evidence that further unconventional stimulus measures are being considered by the central bank. However there are concerns that monetary policy is nearing the limit of its effectiveness.
The US Dollar was left relatively unscathed by a very disappointing end to the week data wise. With all eyes on employment data last Friday, both Non-Farm payrolls and Unemployment came in lower than expected. Non- Farm payrolls were the worst since the financial crisis and unemployment levels saw the largest one month rise since 1975. Even with poor data, the risk attraction due to the virus is keeping the USD relatively strong against both the pound and euro, so the effects of poor data can often be muted.
Looking to the week ahead, US Consumer Confidence numbers are set to be the weakest since November 2013. Couple this with a projected 9 month low from the March CPI Inflation data, the dollar is set for another testing week. However, if the data comes out softer than expected, we are likely to an increase in haven-seeking US Dollar buying.
AUD and NZD
Relying on China
As we start to see glimmers of hope from nations impacted by COVID-19, the AUD has started to strengthen. Australia is closely linked to China and China seem to be over the worst of the pandemic. With this confidence comes a boost in the stock market early this morning as markets open higher. Funds may well be leaving the safety of the USD and going back into the AUD, albeit in smaller numbers to start with. Deaths are continuing to rise, but at a slower pace, giving hope to the world economy.
Australian interest rates are currently at record lows, and with global and Australian growth set to fall over the coming year, it's hard to see how interest rates will pick up in the short to medium term. The world could be set for a substantial recession, but how quickly the Australian economy bounces back from this will be key and also the long term impact of their fiscal measures.
GBP/AUD interbank is currently at 2.0270 after reaching as high as 2.06 only last week. All Australian eyes will be on China to see how quickly they bounce back from this and get their economy back up to speed, dragging Australia with it.
The NZD weakened last week, after recovering from 11 year lows against the USD from the week before. USD/NZD ended last week at a high of 1.7108 but has shown slight improvements to start this week as the NZD movements are once more dictated by risk appetite.
Whilst the NZD has improved from 11 year lows against the USD seen in the middle of March when volatility and risk concerns seem to have peaked, it continues to trade just off its worst level since 2009 and looks vulnerable. Going forward there are hopes that the New Zealand Dollar will be able to stabilise to some extent as China, who New Zealand relies on so heavily for trade, continues to leave its own crisis behind.
This week sees the release of very little significant economic data from New Zealand with only House Sale Data due for release on Thursday so current trends are expected to continue.