Sterling strengthened over the course of July despite a number of factors that might otherwise have hampered it. For a start there was the imposition of lockdown measures for over 4 million citizens following an uptick in the number of positive Covid-19 cases in several northern and central regions. On top of this, travellers were hit with new rules regarding quarantine if they had travelled to Spain – a move that saw a wave of holiday cancellations. Despite this, there were signs that productivity was improving, with both manufacturing, services and retail sales bouncing back, although GDP growth was still a long way below what is needed for there to be a ‘V-shaped’ recovery.
The US Dollar continued on its steep downwards trajectory over the course of July, even picking up a little pace. Three months ago, the US Dollar index stood at almost 104, yet by the end of July it was down almost 11 percent at just over 93. The reasons for this ongoing selloff have been put down to three factors: resurgent Covid-19 cases, worries about political stability and dismal economic data even in the face of massive liquidity injections by the Federal Reserve.
Resurgent Covid-19 cases: there has been an uptick in the number of virus cases detected across the US, with the states of Florida, California and Arizona showing the biggest rises. This has led investors to fear a new series of lockdown across the US, a move that would derail any economic recovery.
Disappointing economic data: figures out last week showed US economic activity had contracted a shocking 32.9 percent in Q2, which would translate to an annualised hit of almost 10 percent. While this was not wholly unexpected, the figure underlined the seriousness of the situation facing the US economy as it tries to regain lost momentum following the virus-related shutdown.
Political instability: with the presidential election less than three months away, market jitters about the possible result remain elevated. News that Donald Trump may opt to postpone the vote led to a spike in fear levels, sending USD even lower.
Meanwhile, the Federal Reserve opted to keep interest rates at near zero at the central bank’s meeting on July 29. According to the bank, “Economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.” For this reason, Fed Chair Jerome Powell is continuing to back a policy of purchasing Treasury bonds and mortgage-backed securities for at least another month. The Fed’s balance sheet now stands at over $7 trillion, up from $3 trillion in March.
By the end of the final trading day of the month, GBP/USD had hit a high of $1.31 – 4.8 percent higher than a month before.
Staying in North America, the Canadian Dollar depreciated sharply against the Pound during July on the back of weak domestic demand and falling oil prices. GBP/CAD began the month at CA$1.69 and ended it at CA$1.75.
Over the course of the last month the Euro has continued to strengthen against most majors – including the US Dollar – although it remained unmoved against the Pound. In the last 100 days EUR has climbed 10 percent against the Greenback, with 3 percent in July alone, leading to speculation that the European Central Bank (ECB) may soon step in to prevent the single currency strengthening further.
One of the main drivers of this rise was increased confidence in the economic prospects for the bloc, with the latest flash PMIs revealing broad-based growth for the first time since February. Combined with the ongoing devastation of its rival, USD, this helped EUR to strengthen. Another major factor that caused investors to buy into the Euro was the signing of a €750 billion stimulus package by EU members.
Against the Pound the Euro remained steadfast, with GBP/EUR starting off July at €1.11 and ending at the same rate, albeit having spent much of the latter part of the month in a weakened state. The Euro’s recent bullish streak could run out of steam in August in the absence of any further positive drivers, although a lot depends on whether a second wave of Covid-19 strikes the EU countries.
Although the Australian Dollar continued to hold onto its recent strength in July, it didn’t manage to do so against the Pound, slipping 3 cents. At the start of the month 1 Pound bought AU$1.80 and by the end that figure had risen to AU$1.83.
Nevertheless, the Aussie performed somewhat better against most other currencies, continuing to rise against the US Dollar and hitting a 15-month high, although slipping against a bullish Euro. Aiding this robust performance were some solid economic datasets, including employment. Although the unemployment rate rose to 7.4 percent this was still better than in many other industrialised nations and bettered expectations.
Risk-off sentiment held up during the month and investors continued to buy AUD despite a shaky global risk scenario overall, especially in regard to US-China trade and political tensions. The currency was furthermore supported by rising precious metal prices, with gold hitting a nine-year high, and silver showing a similar boost.
August could prove to be a relatively volatile month in the Forex markets, with a spate of geopolitical risk events coming to the fore. In addition to the focus on the Covid-19 outbreak and its associated economic impacts, there are heightened tensions between the US and China, with both countries closing down consulates. Domestic political tensions in the US are also running high in the build-up to the election in November. The fact that this increase in risk has not seen an associated rush into USD could indicate that the Dollar is no longer acting as a safe haven in the way it used to.
For the Pound, economic data will be in focus, with much attention being paid to the Q2 GDP figures coming out on August 12. The Bank of England is not expected to make any changes to interest rates when it meets on August 6, although retail sales figures will be closely analysed when they are published on the 20th to see if there are any signs of a pickup in consumer spending.
The Euro’s recent bull run could come to an end if the European Central Bank becomes uneasy about its strength, with fears that exports and competitiveness could be hit if the single currency appreciates further. By contrast, any downturn in global risk-on sentiment could see the Euro appreciate further, as could a pickup in the pace of recovery in the Eurozone economy.
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