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Currency Market Analysis

Apr 06, 2020 | Currency Market Analysis

Global Themes

Glimmer of hope in Europe; the week ahead

• Get used to poor data
• GBP/USD retreats as safe haven demand bites
• Weak Euro looking for a bottom

Data

Get used to poor data

Last week the data docket was full of terrible economic updates, from manufacturing and services sectors crashing across Europe to record breaking unemployment claims in the US. Data for the next few months is expected to be awful given the amount of nations in lockdown and businesses struggling. This week will be no different, and although investors may overlook most of the poor news, any extreme surprises to the downside could trigger increased risk-off behaviour.

Final UK construction PMI is released at 9:30am and expected to follow the services and manufacturing sector, which saw the fall in activity accelerate during March and by the end of the month was below the level of the financial crisis during 2008/09. German industrial output will be released on Tuesday and expected to contract. UK GDP and manufacturing output will be released on Thursday, though this data is related to February’s figures so may be largely ignored. US jobless claims will also be in the spotlight following the record-breaking numbers witnessed over the past two weeks. Inflation data from China and the US wrap the week up on Friday.

  • Meanwhile, the Reserve Bank of Australia holds it monetary policy meeting early on Tuesday morning and the US Federal Reserve will release its meeting minutes on Wednesday night of its last policy meeting.

GBP/USD

GBP/USD retreats as safe haven demand bites

Sterling couldn’t hold onto its winning run against the US Dollar last Friday and ended up well over 1% down on the day. Traders fled to the safe and liquid US Dollar in the aftermath of data that exceeded even the worst forecasts. Dismal economic headlines around the world contributed to a risk-off environment, meaning demand for safe-havens swelled.

The pound had enjoyed a much-welcomed rebound following a devastating week in the height of the market meltdown witnessed a few weeks ago, when investors began to fear the economic impact of coronavirus and the lockdowns across the globe. This rebound was short lived though, and the reality of the crisis began to grip once more as economic data filtered through. There seems to be some calm in the markets, and volatility gauges have certainly eased off from near record highs, but demand for the dollar has trickled back into the market on the growing realisation of a global recession. The pound has traded like an emerging market currency in recent years, and over this uncertain period is likely to retain that pattern.

  • With a huge current account deficit in the UK, reliance on foreign capital, Brexit related uncertainties still lingering and the Covid-19 death toll still rising, it may be risky to assume sterling is out the woods just yet.

EUR

Weak Euro looking for a bottom

Last week, the Euro suffered another weekly loss against the US Dollar, as EUR/USD fell towards 3-year lows. Dismal sector surveys from across Europe combined with the fact that European policymakers struggled to come up with a fiscal package to address the economic fallout from the coronavirus saw investors sell the Euro. This also allowed GBP/EUR to tackle the €1.14 handle.

There are glimmers of hope from Europe that may provide the common currency some stability at current levels. In Italy, France and Spain, the number of daily deaths has fallen as has the number of people requiring intensive care. If this results in lockdown measures being lifted, pointing towards economies reopening in some way, then this should boost risk sentiment. There is a lot of support located around the $1.0750-$1.08 zone on EUR/USD but today might be key in determining whether this area holds as a bottom as the Euro battles to score its first daily win versus the dollar in six trading days.

  • EUR/USD is down nearly 2% this month already and around 3.5% down on the year. The overly weaker sterling in this situation means that GBP/EUR is down over 4% this year but has rebounded in a few weeks from €1.05 to €1.13 where it trades today.


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