14/05 – Sterling continues to struggle as moods darken

GBP: Ties to global sentiment not proving helpful

EUR: Holding up well

USD: No negative rates as Powell lances optimism

Sterling

Sterling is on the ropes as we open up the European session this morning with pressure on the pound coming from a number of areas; reaction to the confusion around the government’s messaging on getting employees back to work, the weak GDP numbers released yesterday, downbeat economic comments from the Bank of England and the Fed, and the continual harbinger of a no-deal Brexit.

As we noted on yesterday’s webinar and in these reports in the past, the performance of the pound is very closely correlated with the performance of global equity markets and the general level of investor sentiment. Both took a hit yesterday as doubts once again increase as to how economies will pick a clear path through this crisis.

If that negativity becomes more entrenched then sterling will likely be one of the worst performing major currencies moving forward.

Euro

Despite yesterday’s run of negativity the euro managed to hold itself up well. We know that investors have been borrowing in euros to invest in riskier assets elsewhere so a poor investment environment would likely see those trades reverse, causing demand for the EUR to increase.

US Dollar

Fed Chair Jerome Powell verbally slapped the optimists yesterday in a speech, arguing that the US economy faces “unprecedented risks”.

Powell told a virtual event that “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems…. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

He also shot down speculation on the prospect of negative interest rates in the US, preferring the Fed’s current ‘toolkit’ of asset purchases and liquidity provisions.

His appearance was the main driver of losses on equity markets yesterday, and the gloomy open today. It will take a recovery in the economic data, or wider belief that a vaccine is just around the corner for a meaningful recovery to bed in from here.

Given it’s Thursday, we will receive an update on the number of Americans that have lost their job in the past week. Analysts expect 2.5m will have lost their jobs in the past 7 days with 25 million still claiming unemployment insurance.

Elsewhere

The Australian dollar slipped overnight following a hideous jobs report that highlighted the largest decline in employment ever – near on 600,000 – in a month. Much like the pound, AUD is tied to global economic fortunes and with the investor mood darker today than it was at the beginning of the week, Australian dollar weakness may become more of a concern moving forward.

Have a great day, and please take care.

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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.