Jason Heppenstall

Pound Struggles To Break Higher as Markets Await Lifting of Lockdown


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April saw the Pound struggle against its rivals as it was held back on news that UK Prime Minister Boris Johnson had been placed into intensive care having contracted the Covid-19 virus. When he re-emerged from hospital the Pound failed to strengthen, with Mr Johnson appearing unwilling to announce measures for ending the lockdown amid warnings that a second wave of the virus could be even more economically damaging than the first. Sterling nevertheless did bounce higher as the month ended due to a US Dollar selloff.

Earlier in the month, GBP/USD had hit a multi-week high of $1.2648 on April 14, before falling back again. Markets are awaiting clear signals on how and when nationwide lockdowns will end and the extent of the economic damage before making any major moves. The GBP/USD outlook for May remains mixed.

US DOLLAR ON WEAKENING TREND ALTHOUGH RISING RISK MAY CAUSE A REVERSE

GBP/USD was relatively calm throughout April, fluctuating between $1.22 and a high of $1.26 before ending the month at $1.25.

The Pound US Dollar exchange rate bounced towards the end of the month on portfolio rebalancing and risk reassessment which saw inflows into GBP. There were no big surprises for the Pound during April, with the Bank of England keeping interest rates steady at their record low of 0.1 percent. Meanwhile the US Federal Reserve further pledged a huge $2.3tn in loans to help minimise the impact of the Covid-19 virus on US businesses.

US stock markets surged during April, with the Dow Jones Industrial Average hitting a high of 24,633 on April 29, causing more Dollar demand as investors chased yield. Nevertheless, at the same time the US Dollar Index (DXY) slipped from 100.69 to 98.93 by May 1 as the soaring stock market created an appearance of normality and saw risk fears ease off.

This rise in global risk-on sentiment took a hit at the end of the month when President Trump appeared to directly implicate the Chinese government in the spread of Covid-19. Mr Trump threatened to inflict economic penalties on China over the pandemic, a move that caused an immediate appreciation in USD. We can expect this to be a major theme driving FX markets in May.

Staying in North America, a dramatic plunge in oil prices is having ramifications for the US economy. With prices of WTI devaluing to sub-$20 levels there is concern that production will be financially unviable in some of the more marginal fields for much longer without some form of government bailout. This would have wider implications for the US economy and may exert downward pressure on USD.

AUSTRALIAN DOLLAR APPRECIATES ON BETTER DATA AND RISK APPETITE

Throughout April the Australian Dollar recouped some of its recent losses as a degree of risk appetite returned. As a result, GBP/AUD showed a pronounced devaluation, falling to $1.94, which is almost 5 percent lower than it was at the start of April.

There was some good news for the Australian economy, with the latest ecostats revealing that employment numbers and productivity were better than feared. Furthermore, manufacturing figures were healthier than in other major economies, and some analysts are daring to hope that the Australian economy has escaped the worst as the Chinese economy comes back online.

Nevertheless, with risk aversion once again in the ascendency on US/China trade fears there is a chance the Australian Dollar and other risk sensitive currencies could in May see a reverse to the strengthening trend.

EURO RATES GO HIGHER DESPITE LACK OF ECB ACTION

April saw what looked to be the peak of Covid-19 infection and deaths rates in Europe, which was good news for Euro investors. Nevertheless, traders were disappointed the European Central Bank (ECB) did not announce a more robust package for dealing with the economic damage than they did.

GBP/EUR moved between a low of €1.13 and a high of €1.15 during April. The Covid-19 outbreak continued to inflict damage on the Eurozone economy, with figures revealing the bloc contracted by 3.8 percent in the first quarter. The French and Spanish economies posting the biggest losses of 5.5 percent and 5.2 percent respectively.

Despite the perceived lack of resolve from the ECB, demand for the Euro remained generally robust, with EUR/USD trading between $1.08 and $1.10. Markets are now anticipating further stimulus measures from the ECB, with some analysts anticipating a more direct approach to providing liquidity for struggling businesses. This anticipation is putting a floor under EUR rates for the time being.

WHAT TO LOOK OUT FOR IN MAY

Markets continue to be focused on central bank responses to the Covid-19 outbreak, although attention is now shifting towards damage assessment and changes in risk sentiment. Of particular note is US President Trump’s stance on applying economic penalties to China over its alleged role in the virus outbreak. If details of this become more concrete over May, we can expect to see more flight to safety at the expense of risk sensitive currencies.

Meanwhile, markets are scrutinising central banks’ stimulus measures in order to gain an insight into future forecasts due to the current lack of forward guidance. No interest rate moves are expected this month, and with rates at all-time lows almost across the board this should not be a surprise.

Instead, intense focus will be placed on analysing how economies will look as lockdown measures are gradually lifted, with any further signs of economic turmoil undoubtedly strengthening USD and EUR over the next few weeks.

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