The Pound Sterling (GBP) found new momentum against the Euro (EUR) after the signing of a Brexit deal, reaching pound to euro highs of 1.20 in February, only to shed the progress in a matter of days this month. The prime driver behind this is the foreign exchange market’s fear of the economic risks posed by the coronavirus outbreak, which they believe still has further to play out.
However, the pound did edge higher against the euro in currency exchange rates on Tuesday, finding a new base at around EUR 1.15 following the positive statement made from Bank of England (BoE) Governor, Mark Carney, who signalled that the BoE was ready for the challenges posed by the coronavirus. Sadly, this has not been enough to completely calm foreign exchange market fears, mainly due to the fact that the pound relies heavily on the flow of international investor capital into the UK.
The United States Federal Reserve’s (Fed) shock emergency interest rate cut has only fuelled these anxieties further, which was a decision made on the premise of mounting concerns over the economic impact of the coronavirus. The last time the US central bank made an interest rate cut of this severity was back in 2008 during the global financial crisis. Following the 50 basis point cut, the GBP/USD exchange rate lowered, with the pair now fluctuating between lows of USD 1.2738 and highs of USD 1.3015.
If the coronavirus epidemic fades in severity and currency markets stabilise then the pound should enjoy more support but the expectation now is that the BoE will follow suit and make an emergency cut in the UK interest rate to protect the British economy. Incoming Bank of England Governor, Andrew Bailey, insisted that a cut is by no means yet a guarantee so foreign exchange markets will be taking a wait and see approach with the pound until new economic data is released.
The Euro to stay strong if data shows Eurozone businesses unaffected by the virus?
The Euro has emerged as the safe-haven currency amid the coronavirus epidemic, although it recoiled slightly yesterday following mixed data released by Eurozone members. New economic data will be released today on German factory orders, which could benefit the euro greatly.
Germany’s retail sales report revealed a rise of 1.8% in the sector, and foreign exchange markets are predicting that the factory report will show similar results in that the sector is performing well under coronavirus pressures.
Europe’s services PMI also saw an overall improvement in February, with consumer and retail activity on the up and the private sector reaching a six-month high in EU countries. At present, the euro is in a much better position than most single currency markets, drawing support from Germany’s economic data and growing hopes that Eurozone members are devising a plan to limit the coronavirus’s impact on the region’s economy.
However, off the back of incoming BoE Governor, Andrew Bailey’s speech, who implied that the bank would be able to act on the coronavirus outbreak without urgency, the pound sterling has rebounded.
GBP/USD rallied after US Fed Bank Cut
With foreign exchange markets awaiting the release of new economic data, single currencies have increased in volatility but one thing that should be recognised is that pound sterling has rallied on the back of the emergency interest rate cut made by America’s Federal Reserve.
The pound revelled in a weakened US dollar on Tuesday, alleviating pressures on the exchange rate and the Sterling has continued to strengthen. After a flat mid-week, the pair trended near a new weekly high of 1.3026 and may have further to go.
The United States of America’s decision to make an emergency 50 bps cut did little to dampen concerns that it would protect the US economy, with the government’s lack of preparedness proving that the coronavirus is negatively impacting their economy.
The US dollar declined further in the second half of this week, although the damage is relatively modest but looking ahead, the US dollar could suffer further losses against the pound following the release of the United States Non-Farm Payroll Figures.
If the US data shows that sectors are slowing down, it is likely that the US dollar will slide and the GBP/USD exchange rate may find new resistance.
AUD makes gains on major currencies
The Australian dollar (AUD) is putting pressure on a handful of other currencies following data showing the country’s economic growth has increased.
The Reserve Bank of Australia (RBA) axed interest rates to an all-time low of 0.50% but foreign exchange markets reacted positively to the move. Usually, foreign currency traders will try to sell currencies subjected to major cuts as it holds little yield value but currency traders interpreted that the interest rate cut would boost the Australian economy.
Despite the Australian dollar being heavily linked to developments of the coronavirus outbreak, the Aussie dollar is strengthening, causing the GBP/AUD currency exchange rate to fall. The latest exchange rate, at time of writing, for the currency pair is AUD 1.9565, a slight improvement on the AUD 1.9319 that it was trading at earlier this week.
The Australian dollar also clawed back losses against the US dollar after falling to an 11-year low and extended its gains following the release of the US services PMI.
However, as China is Australia’s biggest economic trade partner things may not be looking as optimistic for the current quarter, since China’s economy has been severely hit by the effects of the coronavirus.
As it stands, Australian investors are awaiting pivotal data but Pound to Australian dollar exchange rates will remain sensitive for now, in light of the coronavirus and Brexit implications.