May saw the Pound continue to weaken against most of its rivals as traders looked for good news about the British economy and – for the most part – found none. Economic data continued to disappoint, with the Covid-19 induced lockdown measures hampering activity across all sectors as revealed in the latest GDP figures, which showed a 5.8 percent contraction in March on a monthly basis. Pound investors are now hoping that with the gradual easing of lockdown measures we will see a return to some form of economic normality, with a v-shaped recovery making up for lost output.
Despite the poor economic data, Sterling did manage to salvage a degree of support in May on news that the EU could be willing to compromise on a number of key issues, thus avoiding a Brexit stalemate at the end of 2020. Although there has been a lack of progress on the three key issues – fishing rights, a level playing field and the European Court of Justice – rumours that the EU was willing to capitulate have helped Sterling avoid more losses than it otherwise would have against both the Euro and the US Dollar.
The US Dollar faced extra selling pressure during May, with the US Dollar Index sinking below a 200-day moving average of 98.5.
The reason for this continuing weakness was ascribed to a lessening of risk appetite as national economies around the world wind down their Covid-19 lockdowns and a sense of normality begins to creep back. Nevertheless, on the Dollar-positive side, continuing civil strife on the streets of America, combined with a China-Hong Kong flare up, have kept the Greenback’s safe-haven status in the limelight. Another positive was the Federal Reserve’s Jerome Powell stating bluntly that US interest rates would not enter negative territory, although he said the Bank would implement further measures to support the US economy if need be.
Despite the ongoing Dollar depreciation, GBP/USD fell over most of May, slipping as low as $1.21 before regaining some ground to end the month at $1.24. The Pound to US Dollar had started the month off markedly higher at $1.25.
Traders are now awaiting what US President Donald Trump has to say about trade ties with China. Following a recent upsurge in a war of words between the two economic superpowers, investors are nervous that a fully blown trade war would hinder any recovery from the damage done by the Covid-19 lockdowns.
Remaining in North America, oil prices staged a recovery in May, with the sub-$20 price level of WTI rebounding to over $35. This lent some support to the Canadian Dollar, which is partially dependent on the value of its oil exports to the US and elsewhere. As a result, GBP/CAD fell throughout May, from CA$1.73 to around CA$1.70.
Following AUD’s 18-year low in March, Sterling continued to weaken against the Australian Dollar in May as markets began to feel more confident about investing in the Antipodean currency. This saw GBP/AUD fall from AU$1.94 at the start of the month to AU$1.84 by the end.
This bullish recovery has in part been driven by the market’s approval over the way the Reserve Bank of Australia (RBA) handled the emergency measures laid out in response to the Covid-19 crisis, as well as data indicating the initial virus fears had turned out to be overblown. Interest rates are not expected to change when the RBA meets on June 2, with the record low of 0.25 expected to hold. Governor Lowe will be providing forward guidance that will no doubt be scrutinised by traders and may continue to spur demand for the Australian Dollar throughout June.
The Euro remained strong in May, maintaining a two-month high against the US Dollar and the Pound as hopes for a strong recovery from the Covid-19 pandemic as well as closer political integration in the EU kept the currency buoyed. An announcement by the European Commission on the issuance of joint debt –effectively disbursing debt directly to member states – was conceived as being an important step on the road to closer economic integration.
This positive sentiment was hardly matched by recent data prints, which showed prices in the Eurozone dropped for the fourth month in a row in May meaning inflation is now almost at only 0.1 percent year-on-year. With inflation being one of the key targets for the European Central Bank, there are now concerns that if the trading bloc slips into a deflationary crisis the Bank will have to take drastic measures, such as cutting interest rates even further.
Meanwhile, the European Central Bank (ECB) is due to convene in early June and is expected to increase its emergency asset purchases, although no changes in interest rates are forecast.
A number of risk factors are liable to present themselves in June, not least of which is the unfolding economic damage caused by the Covid-19 pandemic and the subsequent lockdowns of workers. With more data coming in from the key lockdown months of April and May, traders will be armed with more information to assess the extent of the economic repairs that will be needed.
In addition to this, the simmering China-US trade row will continue to drive risk sentiment, as will domestic strife on the streets of the US and Hong Kong. Despite these dangers, however, risk appetite may continue to slowly improve, driving demand away from the US Dollar and other safe havens.
As far as the Euro is concerned, all eyes will be on the ECB to see what measures it proposes to prevent the bloc heading into a deflationary spiral, with most traders expecting more QE in the form of the Pandemic Emergency Purchase Programme (PEPP).
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