How are world economies and currencies coping with Coronavirus?

As Q2 of 2021 approaches, markets continue to react and adapt to the Coronavirus crisis. Though the global outlook is improving, on the whole, economies are still proceeding with caution.

Currencies have been understandably volatile, with big shifts in Sterling (GBP) strength against its major currency counterparts, with threats looming over “safe haven” currencies old and new, including the US Dollar (USD), Japanese Yen (JPY), Swiss Franc (CHF) and the Euro (EUR).

Whilst these currencies are often considered to be a port in the storm, their outlook could be set to change, as economic storm clouds still hovering over Europe and the USA, with the Eurozone navigating through a third wave of coronavirus cases.

World economies and Coronavirus

Are currency markets able to shrug off the economic woes caused by COVID-19, given that they are all experiencing the same economic damage and monetary policy change? Can these safe-haven currencies remain the prevailing trend in the face of ongoing uncertainty?

Bleak outlook for the Euro (EUR)

Economic forecasts for Germany and France – both are key economies for the Eurozone. Each country has faced great economic struggles and faces the continued economic implications of extended lockdown restrictions amid a third wave of infections. Coronavirus cases and death rates within Germany and France are rapidly rising once again, dampening the outlook for the Euro (EUR) and shaking market confidence.

Christine Lagarde, president of the European Central Bank (ECB) previously acknowledged how Europe’s economic recovery is rapidly losing momentum following the surge of COVID-19 cases. The bank added billions to its coronavirus recovery fund last year, as Lagarde recently announced that the ECB will ramp up bond purchases in a bid to soothe the market.

It’s thought that other European countries will follow France and Germany’s lead, entering into extended lockdown restrictions, which is likely to add even further pressure on the Eurozone economy. Germany has extended its lockdown by three weeks, heading into Easter following a rise in coronavirus cases, with Chancellor Angela Merkel stating the country is in a ‘very serious situation.’ France have also announced a partial lockdown, which is said to last for four weeks.

The gloomy outlook has caused the euro to US dollar (EUR/USD) to struggle over recent weeks, falling to USD 1.18, down from USD 1.22 in February.

COVID-19 batters US economy

Following an incredibly difficult 2020, US economic optimism appears to have returned thanks to the passing of President Joe Biden’s USD 1.9 trillion stimulus package.

The US has been the country most affected by the coronavirus crisis, with over 29.9 million recorded cases to date and 543,000 recorded deaths at the time of writing.

US unemployment rates have been particularly shocking throughout the pandemic. When Donald Trump first became president in 2017, unemployment stood at 4.7%. During April this year, the figure jumped to 14.7%. Biden made clear that unemployment would be one of his biggest priorities as president, with the figure already falling to 6.2% in February.

During the Federal Reserve’s March policy meeting, it was stated that the US economy would recover more quickly than initially anticipated. The Fed predicted that US GDP would grow by 6.5% this year, up from 4.2% which was forecast last December.

As a result of the US’ improved economic outlook,  the British pound to US dollar (GBP/USD) pairing has come under pressure, currently trading at USD 1.38, down from recent highs of USD 1.40.

Japan’s economic recovery ‘highly uncertain’

The number of daily COVID-19 cases in Japan has seen improvement this year. Back in August 2020 daily recorded cases were around 1,998, before shooting up to around 7,000 in January this year. Cases saw decline in February, though daily averages for March have risen slightly to around 1,300.

Whilst the rate of infection is showing signs of improvement, the Bank of Japan (BoJ) have previously stated that the outlook for Japan’s economic recovery is ‘highly uncertain’. Whilst Japan’s economy has fared much better than its peers, the forecast for economic growth from the BoJ has since been reduced.

In its quarterly report, the BoJ lessened its growth forecast for the current fiscal year ending March 2021. The bank stated that they believe Japan’s economy would shrink by 5.6%, compared to the 4.7% slump predicted in July. The contraction appears to reflect the sluggish spending within the services sector over the summer.

However, the bank believes that Japan will see a strong recovery in 2021, having increased their projections for the next fiscal year beginning in April 2021 to 3.9%, up from 3.6% predicted previously.

It’s hoped that with the number of COVID-19 cases gradually lowering, Japan will safely avoid the need to impose further lockdown measures like many other countries.

The Japanese Yen (JPY), however, still appears to be maintaining its status as a safe-haven currency, continuing to rise against the British pound (GBP). Currently, the British pound to Japanese yen (GBP/JPY) exchange rate stands at JPY 149.70

The British pound (GBP) is likely to continue to struggle against its competitors over the coming weeks due to the impacts of the third national lockdown, as well as post-Brexit tensions with the EU.