GBP: Record decline in UK GDP

EUR: Holding up well

USD: Covid resurgence damaging risk sentiment

Sterling

With 7% falls on US equities overnight it is no surprise that sterling is looking a little down in the mouth this morning. The next few days will show whether the dip can be rescued by bargain hunters or whether the recent exuberance has finally ended.

Sterling has not reacted much to today’s announcement of a 20% fall in GDP in April – the worst figure on record – occurring when most UK businesses had people working from home or on furlough. The 20% fall is a shocking figure none the less but gives us a good idea of how deep the trough is that the UK economy needs to make its way out of in the coming quarters. UK GDP has fallen down the lift shaft and will now have to take the stairs – a much slower and more labour intensive process – back up to recover.

With a Brexit showdown in the coming fortnight, we can but hope that today’s numbers focus a few minds in to providing an extension to the current transition period so as to relieve businesses from fighting two of their largest ever battles concurrently.

Euro

Headlines from the Eurozone that policymakers still have hurdles to overcome to agree on the provision of stimulus have yet to hit the single currency, which is holding up admirably in the face of yesterday’s severe shift in market sentiment.

We expect the euro to outperform sterling through the 2nd half of the year.

US Dollar

Having seen some stock markets print new highs for the year, it was perhaps obvious that a sharp decline was around the corner. US stock falls have led into declines which are being extended in Europe as well this morning.

As we noted yesterday, while the Federal Reserve’s sanguinity around the US economy may have started the declines in risk, the increased fears of a 2nd wave of Covid-19 infections were the main driver of market fears.

Reports overnight that officials in Houston are “getting close” to reimposing stay-at-home orders are the most prominent with sharp gains in infection rates in a number of states in the past few days.

Yesterday’s Initial Jobless Claims numbers didn’t help matters by failing to confirm the optimism provided by last week’s payrolls announcement. Optimists will have to wait for the data to back up the recovery narrative it seems.

Elsewhere

Following the market narrative of increased uncertainty the CHF was the best performer yesterday, driving below the 1.07 level in EURCHF. A break above 1.0770 is bullish for the pair but that looks out of the realms of possibility today.

Have a great day, a better weekend and please take care.