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Currency Market Analysis

Jun 05, 2020 | Currency Market Analysis

Global Themes

EUR/USD soars dragging GBP/USD with it

• ECB stimulus boosts Euro
• Sterling shrugs off Brexit impasse
• US jobs report a key trading point

ECB

ECB stimulus boosts Euro

The European Central Bank (ECB) confirmed yesterday that it was increasing its bond-buying programme by €600bn, slightly above market expectations, to support the Eurozone’s coronavirus-stricken economy. This sent the Euro climbing higher allowing EUR/USD to storm through $1.13 and GBP/EUR to fall towards €1.11.

The ECB’s move to increase its Pandemic Emergency Purchase Programme (PEPP) brings the new total to €1.35tn in an attempt to stop the Eurozone from sliding into deflation following weak economic activity and lower energy prices. The central bank also extended the timeframe of the bond-buying programme until 2021, again beyond expectations of six months. The market response was a positive one, as more stimulus of this sort is expected to help speed up the economic recovery in the bloc and soak up the debt that Eurozone governments are expected to issue this year.

• EUR/USD has staged an 8-day winning streak, climbing over 4% and approaching a 3-month high. The stronger Euro resulted in GBP/EUR slumping towards €1.11. The €1.10 level could come into play for GBP/EUR if EUR/USD presses on towards $1.15.

GBP

Sterling shrugs off Brexit impasse

Following three days of virtual talks between the UK and EU this week, officials have announced that progress is still lacking. Key talking points like fisheries and the future alignment of business regulations remain stumbling blocks and the risk of a stalemate will likely ramp up fears of a no-trade deal Brexit.

The British Pound has largely ignored this pessimistic outlook and trades just under $1.27 versus the US Dollar this morning having been at $1.23 last week. It seems the focus is shifting to UK PM Boris Johnson and European Commission President Ursula von der Leyen who are expected to meet later this month to try and break the deadlock. The UK has to request an extension to the transition period by the end of this month if it wants one, but UK officials insist it is unnecessary. Michael Gove, Cabinet Office minister pins his hopes for a deal on German Chancellor Angela Merkel and her diplomatic skills given Germany assume the rotating presidency of the EU on July 1.

• The pound remains buoyed by the risk-on sentiment dominating markets, but Brexit risks still loom and despite the optimism helping sterling climb, negative headlines could abruptly change the path of sterling later this month.

US jobs

US jobs report a key trading point

The US employment report is due at 1:30pm today and after a torrid week for the US Dollar, better than expected data may even intensify this trend. The non-farm payrolls figure is forecast to have fallen 8 million in May, though far less than the record 20 million plunge in April.

Yesterday’s macro calendar revealed the number of Americans filing for unemployment dropped below 2 million last week for the first time since mid-March, which despite still being a frighteningly high number, fuelled further market optimism for an economic recovery. The positive market mood seems overdone considering 2 million jobless claims is still three times larger than the peak during the global recession in 2008/2009. The unemployment rate is published today too and is forecast to jump to 19.8% in May, a post-World War two record.

• Should today’s jobs report miss forecasts and paint a bleaker picture of the world’s largest economy, then risk sentiment may be tainted and profit taking on riskier assets could see equities fall, the AUD, NZD and GBP may all scale back and the safe havens, including the dollar, may rise.


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