How has Coronavirus affected foreign exchange markets?
The full impact of COVID-19 is unknown but its influence on the FX market to date has been significant. Within two weeks, GBP/USD has been as low as 1.14 from 1.31. This week the pairing fell to lows unseen since 1985. The USD is traditionally a safe haven currency in times of crisis, but the 12 per cent collapse in sterling has been dramatic.
GBP has also been weak against the EUR, dropping eight per cent in the last fortnight. GBP’s nosedive against the USD and EUR has been replicated by commodity currencies like the Canadian and Australian dollars which have gone to their lowest points since 2015 and 2003 respectively. Those unprepared for this rapid decline have felt its impact and will be looking to mitigate against such shocks in the future.
Looking ahead, dramatic shifts in currency value are certainly here to stay as global markets are running on sentiment rather than measured evaluation. Despite the clobbering against USD and EUR, UBS remain confident in GBP’s ability to bounce back. Their forecast for GBP/USD-strength in June is being revised down from 1.35 to 1.33. This indicates that despite yesterday’s emphatic plunge, a sizeable recovery could happen depending on how the following weeks play out.
If the response from central banks and national governments are sufficient to prop up economies over the coming months then the wild swings of the last few days will likely be revised. But if cracks start to appear and the response is insufficient to hold markets together then expect to see more downward pressure.
What is causing movement and volatility?
GBP has reacted negatively as the effects of COVID-19 start to be felt in the UK. There are suggestions that the government’s handling of the process so far has been off the mark and in turn, this has spooked market confidence. As London approaches lockdown and the inevitable economic slowdown that will accompany the closure of the capital, the government’s response and reaction will be key to the future direction of GBP.
Chancellor Rishi Sunak’s announcement on Tuesday 17.3 of a broad raft of economic relief, equivalent to 15 per cent of GDP, was effective in holding the value of sterling at 1.20 for a few hours.
However, Wednesday’s [18.3] dive down to 1.14 demonstrates that more fiscal measures are needed to shore up the economy.
Monetary policies, such as cutting interest rates, have been ineffective as shown by the lack of reaction to announcements by the ECB and the Fed to reduce interest rates.
The Bank of England’s commitment to ‘unlimited’ Quantitative Easing on Thursday last week coincided with Sterling hauling itself back above 1.15 where it is currently holding its breath.
Sentiment remains distinctly on edge as markets draw breath after yesterday’s enthusiastic sell-off. The reaction of central banks and the fiscal approach governments take is key to subsequent market movements and currency volatility over the next few weeks.
We will keep you updated on currency movements throughout the process. We are open for consultation and will continue to seek opportunities and work with you in these exceptional times.
How can you navigate the current landscape and create opportunities?
At Privalgo, our professional consultancy is backed by state-of-art technology and experience. From mitigating against the risk of potential loss of business due to the current coronavirus crisis, or hedging against uncertain times for GBP and other major currencies, we are open for business as usual. Utilising our expertise assists with the timing and execution of trades to take advantage of opportunities in the market, as well as adjusting and tailoring the most suitable hedging strategy for the uncertain period ahead. Whatever your FX requirements our experienced representatives will provide the strategy and tools to maximise your FX potential.