12/08 – UK recession is deepest in Europe

GBP: UK in deepest recession on record

EUR: Positivity drifting away

USD: Biden picks Harris as running mate

Sterling

Figures out this morning confirmed that the UK economy has fallen into the deepest recession since the invention of Gross Domestic Product as a measure of economic prosperity and marks it out once more as the ‘sick man’ of Europe with the 20.4% fall in output, the largest in Europe by some margin.

June’s month-on-month GDP figure showing an 8% increase in output is encouraging however, given the relative weakness in the services sector and the inherent issues that social distancing will cause for businesses in the hospitality and retail sectors, we cannot be confident of returning to pre-pandemic level of growth until 2022.

The true scale of the economic damage that the pandemic has caused are now becoming fact, and it is clear to see that businesses and consumers have enough to worry about without another existential crisis – the conclusion of Brexit – also due in the next 4 months.

While the recession is most certainly over from a technical point of view, the damage of a failing jobs market is yet to be felt and marks out sterling for further falls.

Euro

A rally in German business confidence offered the euro some support yesterday before the single currency fell back in line with wider moves elsewhere in markets.

It’s easy to see that some of the optimism that characterised trade in the euro in July is starting to evaporate in the past week or so and we cannot rule out further slips in the value of EUR as attention shifts to rising Covid-19 cases on the continent.

US Dollar

Democratic candidate for the Presidency Joe Biden has picked Senator Kamala Harris as his running mate in a decision that had been largely expected; she is a Senator from California, went up against Biden in Primaries and will have gone through several the vetting processes that candidates must endure so as to eliminate any skeleton filled closets.

Given the ongoing race relations debate and protests in the US as well as the conversation over the role of the police, having a black woman who used to work as a prosecutor makes sense.

Biden has long been supported by black voters and will often harken back to his role as Barack Obama’s No.2 in order to paint himself as a friend of the black community. Having Senator Harris by his side would only increase that support.

The market impact is relatively light however with political pressures expected to pick up in September.

Elsewhere

In line with our wider expectations the NZD has fallen overnight following last night’s Reserve Bank of New Zealand meeting that saw the central bank increase its quantitative easing program whilst also telling markets that negative interest rates are in ‘active discussion’ as well. It is unclear if the RBNZ were this dovish before the recent community outbreak of Covid-19 in Auckland but it shows a central bank that is aware that further support is necessary regardless.

Have a great day.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.