Coronavirus is dominating headlines and ultimately controlling markets
It’s already March, and the foreign exchange market is shaping up to have a busy month. The global outbreak of Coronavirus dominates headlines as well as global currency markets. Given the severity of what is verging on a pandemic, typical indicators and events have taken a back seat whilst markets try to price in the unknown. Trade talks, the budget and the following will also have an effect on Sterling. Here is a roundup of what we can expect for the Pound and the wider market.
Coronavirus has now spread globally. With over 100,000 cases worldwide and that number only heading in one direction, it will be the headlines that control markets for at least the short term.
The Viral outbreak has sent markets into a spin with disruption to supply chain and office closures dramatically affecting economies all over the world. Aside from an early dip in the Japanese Yen, we have again seen safe-haven currencies shine while exposing many other currencies to increased volatility.
The Pound has always relied on international investment flowing inward, so the knock-on effects from Coronavirus will have a dramatic impact on its strength. We’ve seen a big correction in stock markets and if that continues it will have a big impact on the pound moving forward. G7 central banks around the world are also countering any downturn from the virus by loosening monetary policy. Bank of England could follow suit with the US and cut interest rates this month.
Although the impact of the budget on sterling has reduced due to this epidemic taking centre stage, the March 11th announcements could provide some support for Sterling. With bold fiscal expenditure planned, we could see even more spending because of Coronavirus. Will the market see the budget as bullish for UK growth and in turn boost the pound?
At the time of writing, Sterling sits against the Dollar in much the same position as it did back in October at 1.2807. The question now is whether the Coronavirus fears cap any potential GBP gains brought on by a positive budget, and how the market will be perceived as time goes on.
A New Governor
The new BoE Governor Andrew Bailey stated early this week that limiting the economic fallout from Coronavirus was his most pressing task in the short term. He alluded that the BoE will very likely provide bridging finance and potentially cut rates.
However, he did also mention that they might not directly follow the US in cutting rates, whose market context is very different. Although rate cuts are far from guaranteed, they seem likely given the current domestic and global climate. If they are cut, we would probably see any post-budget rally from Sterling wiped. However if rates are held, then next week could be a positive one for Sterling.
Trade talks have been put on the back burner with Coronavirus dominating news stories. But investors will have to focus their attention back at some point soon. We saw the large Boris bounce for Sterling when a Tory majority got the agreement deal finally passed.
Now we have a long hard slog that will impact the key parings against the USD and Euro. Currently, the talks have been reported as ‘productive’ by those involved. A good sign for Sterling due largely in part to the press having to report much the same result. Although Britain is insisting on a Canada or Australia style deal, factors such as fishing rights and tariffs remain at the front of everyone’s minds. It’s an unfortunate coincidence that Coronavirus is not exactly making things better.
For now, the economy has to struggle through this terrible infection alongside the population. As for Johnson and Bailey, they’re resigned to doing what they think is best, perhaps in spite of each other.