Pound Limps to 6-Month Low Amid COVID-19 and Brexit Fears

Pound Limps to 6-Month Low Amid COVID-19 and Brexit Fears

Published: March 18th, 2020

Last week’s EURO rally has slowed down, but ongoing weakness in Sterling has led to a falling GBP/EUR exchange rate.

While pair opened last week at 1.1556, this week has seen it trending lower – plunging by 5 pence to 1.1037 at one point. At mid-week, it was trending near a low of 1.1008, its worst level since September 2019.

Rival strength continues to hammer the Pound as the growing coronavirus pandemic dominates news and financial headlines.

The Euro also benefitted from weakness in major rivals like the US Dollar, which had dropped due to new central bank action designed to lessen the economic impact of the outbreak.

Sterling’s price driven by strength of rivals

The Pound’s limping price movement over the past week is driven by rising concerns over the coronavirus’ potential impact on British business – alongside previous anxieties about how well the country will fare in the post-Brexit trade environment. Those combined worries are now weighing on Sterling.

The Euro spent much of last week held aloft by demand for safe-haven assets. Before the Fed's significant interventions over the weekend, the GreenbackGreenback also saw a bump on safe-haven demand.

As Sterling had been climbing thanks to a weaker US Dollar since late-February, last week’s US Dollar rebound hit took a toll. The Dollar's drop on Monday proved to be temporary, with a notable rebound on Tuesday.

The Pound's appeal looks limited this week as investors shift to safe havens, including the Euro.

Even amid Europe’s outbreak, EUR looks like a safe haven

Despite the outbreak’s epicentre moving to countries like Italy, France, and Spain, investors are looking to the Euro as one of the market’s most appealing major currencies.

Even amid the outbreak, EUR has benefited from safe-haven demand. Analysts say this is due to its popularity as a funding currency, as well as the US dollar’s wobble last week.

While the Greenback is generally seen as safe, Feds interest rate cuts and speculation caused the Dollar to tumble, with the Euro the primary beneficiary.

The Fed’s most recent emergency US interest rate cut had the Dollar dropping again on Monday, helping the Euro start the week on a high – to the Pound’s detriment.

BOE to restart quantitative easing?

Rising anticipation that the Bank of England will soon introduce a new round of quantitative easing (QE) is another critical factor influencing Sterling.

Analysts say the Pound is particularly vulnerable to the effects of quantitative easing, reminding market watchers that the currency fell sharply after the BoE’s first round of quantitative easing back in 2008. Fears are that ‘QE2’ (as its being dubbed) could dilute positions and drive prices lower against the Euro and others.

Quantitative easing effectively means having the central bank print additional money, which is then used to reduce market risks buy purchasing bonds issued by businesses and governments. Increasing demand for those assets lowers their yield and makes them less desirable to foreign investors.

Expectations for a renewed QE programme grew at the start of the week after new BoE Governor Andrew Bailey promised ‘prompt action again’ in response to a weakening UK economic and financial outlook due to the coronavirus outbreak.

His comments on Monday are seen as a sign that the bank could slash interest rates and start a new programme of quantitative easing the end of March. Analysts now expect the central bank to cut its rate to 0.10% in the coming weeks and announce a new QE programme in the range of £50 to 75bn.

Such moves could give markets a shot in the arm, but from a forex, perspective could also drive continued weakness in the Pound.

The Pound-to-Euro exchange has taken a beating in anticipation of fresh BoE action. Downside pressures could even see Sterling match the Euro in terms of valuation. The last time this occurred was in 2008, following the onset of the recession.

Suggestions that we are on the brink of another interest rate cut and additional BoE stimulus have risen amidst the week’s markets meltdown as investors prepare for a slump in global economic activity.

It’s worth noting however that BoE interest rates are already near their 'lower bound' in terms of monetary policy. Going beyond this point could yield very little, and even risk damaging the financial system further if bank profitability takes a hit.

The UK maintains a large and ongoing current account deficit owing to the fact that the country imports more than it exports. Sterling's longer-term valuation is therefore reliant on a steady inflow of foreign investment.

That reliance on inbound flows is expected to be a source of weakness for the Pound in periods where investor sentiment turns negative, as the coronavirus outbreak is proving.

Quantitative easing, with all its adverse impacts on currency valuation, might be the only option in the central bank’s policy toolkit to stimulate a rapidly slowing economy.

Numbers to keep an eye on this week

Several key UK and Eurozone statistics will be published this week that could also impact Sterling.

UK job statistics and Eurozone economic sentiment data are due out on Wednesday, followed by Eurozone trade and inflation numbers.

However, unless the numbers are surprising enough to influence European Central Bank (ECB) interest rates, concerns about the impact of COVID-19 and government responses will likely overshadow everything else.

Recession fears are rising this week as the number of cases in Europe and America surges.

If the UK situation worsens and affects the Brexit timeline, the Pound could see renewed pressure. If rivals remain weak, the Euro could continue to benefit from safe-haven demand even as the outbreak in Europe worsens.

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