In contrast to February, the Pound spent much of March falling back against the majors, sinking dramatically against the Dollar at one point, and to a lesser degree against the Euro. Stimulus measures announced in Rishi Sunak’s first budget failed to quell the exodus from Sterling, while a simultaneous rate cut from the Bank of England aggravated matters. With UK interest rates now standing at a record low 0.1 percent, FX traders will now be focusing on economic indicators once more as we start to get a picture of how much damage the UK economy has sustained – and continues to sustain - from the Covid-19 outbreak.
The Bank of England had opted to keep interest rates steady at 0.75% at the end of January, but March proved to be a whole different ball game and two emergency cuts were forthcoming, bringing rates down to a record low 0.1 percent. At the same time, new chancellor Rishi Sunak unveiled a massive fiscal stimulus package for the UK, as well as measures that were designed to help businesses through the worst of the Covid-19 slump.
Sterling was already on the slide against most majors, even though other central banks were also cutting their interest rates, but it was 19 March that saw the most dramatic slump, with the Pound falling to a 35-year low against the US Dollar, hitting $1.14. The reason? Traders were panicking that the UK’s virus response didn’t match up to the US response, and without the EU to ‘tether’ the UK economy there was nothing to stop the Pound sinking lower.
The second half of March was kinder to Sterling, with GBP rising off its earlier lows, and positively charging ahead against risk sensitive currencies such as the Australian Dollar (GBP/AUD posting a 7 percent rise) and the New Zealand Dollar.
High: $1.31 Low: $1.14
Fed Chair Jerome Powell stepped up his economic war against the coronavirus in mid-March by cutting the key US benchmark interest rate to almost zero and unleashing a $700 billion stimulus measure in the form of purchases of Treasury and mortgage-backed bonds.
This was the second such interest rate cut in as many weeks, with the Fed stating that rates would be kept low “until it is confident that the economy has weathered recent events and is on track (to achieve its goals of stable prices and low unemployment).”
Stock markets didn’t take much notice of the Fed measures and selling resumed almost immediately, taking key indices lower.
Nevertheless, the US Dollar continues to remain resilient in the face of the pandemic, fulfilling its role as global reserve currency and a safe haven for investors. The US Dollar index (DXY) – a measure of overall Dollar strength against a basket of currencies – rose from around 96 at the start of March, to finish up at almost 100 by the beginning of April.
This is despite some worrying unemployment figures coming out of the US which revealed that the number of jobless rose by 6.65 million in the last week of March alone.
Staying in North America, the Pound fluctuated against the Canadian Dollar over March, with GBP/CAD rising to CA$1.79 as global oil prices continued to sink – with both Brent crude and WTI crashing to the $20 handle. By the start of April, however, the Pound to Canadian Dollar exchange rate had fallen back again to around CA$1.76, although it remains volatile.
High: €1.15 Low: €1.06
Focus moved onto the Eurozone in March as Europe became the epicentre of the global Covid-19 virus outbreak. Markets are watching for the possible ramifications on the Eurozone economy and what that means for the Euro.
It was against this backdrop that many FX traders were expecting the European Central Bank (ECB) to cut interest rates in March, but in the event the central bank opted not to do so.
With Eurozone interest rates already in negative territory at -0.5 percent, the ECB instead unleashed a €120 billion stimulus package to help businesses.
Explaining this, Holger Schmieding, an economist at Berenberg, stated:
“Contrary to expectations, the ECB did not cut its deposit rate more deeply into negative territory. Instead, the ECB will buy more assets with a focus on private sector bonds and inject even more liquidity at even more favourable terms into the banking system.”
This had the effect of stabilising the Euro against other currencies, and over the past month we have seen GBP/EUR fall to €1.06 before rising back to €1.13, while EUR/USD hit a high of $1.14 before settling at $1.09 by the end of the month.
High: AU$2.09 Low: AU$1.95
The Australian Dollar continued to suffer throughout March as slumping demand for commodities from China – Australia’s biggest trading partner – hit demand for AUD, while risk-averse traders shunned the currency.
As a result, the GBP/AUD exchange rate powered ahead in March, hitting a high of AU$2.09 on 21 March, before falling back to AU$2.06 by the start of April.
Another blow for the Aussie came from a report by the OECD, which estimated that the Australian economy could shrink by a staggering 22 percent in the short term, despite the Reserve Bank of Australia’s two emergency interest rate cuts in March.
On top of this, retail sales and exports both slipped at the start of the year before the coronavirus pandemic became big news, meaning that it seems likely AUD will remain under pressure for the foreseeable future.
The Pound to New Zealand Dollar exchange rate exhibited a similar pattern to GBP/AUD -albeit not as pronounced - with GBP/NZD rising around 3 percent from NZ$2.03 to NZ$2.09 by the start of April.
With central banks around the world having mostly exhausted their options for using interest rates, traders are waiting nervously to see how much damage has been sustained by the major global economies and what, – if anything, – policymakers plan to do about it. With interest rates everywhere either close to or below zero, any new policy measures are likely to come in the form of direct interventions in the market.
As things stand, the US Dollar remains in a position of relative strength, while Sterling is at the mercy of news headlines relating to the extent of the economic damage caused by Covid-19, and the likely duration of any lockdown.
9th APR (GBP/USD): US Initial Jobless Claims (Apr)
15th APR (GBP/USD): US Retail Sales (Mar)
29th APR (GBP/USD): US GDP Q1
29th APR (GBP/USD): US Federal Reserve Interest Rate Decision
21st APR (GBP): UK ILO Unemployment Rate
23rd APR (GBP): UK Markit Services PMI (Apr)
6th APR (GBP/AUD): Australia ANZ Job Advertisements
7th APR (GBP/AUD): Australia RBA Interest Rate Decision
29th APR (GBP/AUD): Australia Consumer Price Index (Q1)
22nd APR (GBP/EUR): Eurozone Markit PMI Composite (Apr)
30th APR (GBP/EUR): Eurozone GDP (Apr/Q1)
30th APR (GBP/EUR): Eurozone Consumer Price Index (Apr)
30th APR (GBP/EUR): Eurozone ECB Interest Rate Decision
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