British pound regains balance against euro and dollar as stock and commodity markets recover, British GDP decline ignored

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– UK sees economic crisis watering eyes
– Market collapse hits GBP against EUR, USD and JPY

– But results in gains compared to AUD, NZD
– Markets appear more stable on Friday
– Is the rout over or is it a break?

Image © Adobe Images

Pound rebounded before the weekend amid a timid recovery in global stock markets and investors’ refusal to take note of the UK’s worst GDP release which showed that the economy has retreated at its own pace the fastest ever recorded in April.

The pound is trading higher against the dollar and the euro, following the release of GDP data which showed that the British economy suffered a 24.5% year-on-year decline in GDP in April, thanks to the Covid-19 lock.

“GDP data shows that at its peak in April, the foreclosure reduced economic output by 25%, making the coronavirus crisis by far the deepest recession on record. In comparison, the drop in GDP from peak to trough was 7% in the two countries. “The global financial crisis and the Great Depression,” said Andrew Wishart, British economist at Capital economics.

Despite the staggering data, the pound showed little reaction to the figures confirming that they were expected by the market. Indeed, the United Kingdom is not the only one to experience such an economic contraction because it is a model that is repeated throughout the world. We would say that what matters from here is the speed with which economies recover from the crisis, with the foreign exchange markets likely to reward the currencies of those economies that return to growth most quickly and the more vigorously.

For Sterling, the short-term focus remains on movements in global stock markets and commodity prices, which tend to rise before the weekend after the substantial decline experienced in the past 24 hours.

“The risky assets have pulled out of the floor and the USD has weakened next to it,” said Mark McCormick, analyst at TD Securities. “The market will focus on the general tone of risk and the spread of the virus in the direction of Thursday’s strong risk trend.

The stock markets were under significant pressure this week, in a context of disappointment at the absence of new stimulus measures announced by the Federal Reserve midweek and old-fashioned profit taking on a rally that seemed to be getting ahead, given the dire state of the twisted world economy.

Above: GBP / EUR last week

We find that the pound tends to lose value against the “safe havens” of the dollar, yen, franc and euro when the markets are selling. The flip side of this equation is that the British currency tends to win against commodity currencies such as New Zealand and Australian dollars, as well as developing market currencies like the South African rand.

What is interesting, however, is that the sharp drop in stock markets and commodity prices observed this week has no single narrative behind it, but rather a combination of factors at play such as concerns over new cases of covid-19 in the United States, the fatigue of the rally and disappointed investors who apparently need new regular pumps from the Federal Reserve.

“The provisional signs of potential Covid-19 escapes in a number of key US states provide warning signs of a potential increase in cases in the coming weeks. With the S&P 500 and Nasdaq recovering all of the liquidation of the coronavirus, the risk rewarding the outlook has always been strongly biased downwards, “says Joshua Mahony, senior market analyst at IG.

The pound-to-euro exchange rate fell to 1.11135 after hitting 1.1280 this week amid declining investor confidence.

The pound-to-dollar exchange rate fell to 1.2590, after 1.2811 at the start of the week.

“I have rarely seen such an amazing reversal of market sentiment – from” buying everything “to” selling everything “in a day or two,” said Marshall Gittler, head of investment research at BDSwiss Group. “From the FX perspective, yesterday’s market was proof of the safe haven characteristic of the dollar. The immediate cause of the stock market collapse worldwide is the fear of new infections in the United States, yet the dollar was the best performing currency. ”

GBP to USD this week

Above: GBP / USD last week

How the pound ends the week ultimately depends on how the overall picture unfolds, so far the mood has improved, which should allow for some consolidation.

Futures on American indices as cited by IG are looking to open higher, so maybe the rout is over. Whether it’s a floor or a break, that’s the billion dollar question.

Index US 500

Above: IG S&P 500 chart, with futures showing respite potential before the weekend

The end of the market on Friday should indicate whether the recent rally – from late March to just last week – is actually a rebound in a larger bear market, or whether this week’s decline is a dip in a real recovery that can continue. .

Readers should keep an eye on the progress of new covid-19 cases in the United States at the end of the lockdown, as data from Texas and Florida are not encouraging. If the United States has effectively left the lockdown too soon and there is a second peak of infections, we expect further market tensions.

“The cause of this turnaround is growing evidence that the dreaded” second wave “of COVID-19 infections is indeed starting in the United States as most states come out of the lockdown and people behave as if the virus had been eliminated. We see an increase in the number of cases in several states a week or two after the lockout ends. Typically, this is in Texas, where new cases have reached their highest level ever reached a few weeks after the lockout ended, “said Gittler.

Texas case

There are, however, two points to note: 1) US President Donald Trump has indicated that there will be no return to blockages, regardless of the course of the disease in the country. This is understandable given his desperate desire to see the economy and markets recover before the November elections, and 2) there have been no significant examples of a second wave of covid-19 elsewhere in the world. Yes, infections increased in some countries after the measures were relaxed, but this is not the case for the second wave.

We are therefore inclined to view the recent market decline as a decline in the recovery, noting that substantial support is offered by the United States Federal Reserve and other global central banks, suggesting the funding pressures that characterized the sharp decline late February / repeat early March is unlikely.

This observation is important for those watching the pound sterling markets, as it was these funding pressures that put the pound under significant pressure and caused declines below 1.10 against the euro and 1.20 against the US dollar.

Global stock markets tend to be forward looking, therefore the recovery may now be reflected in stock prices and the markets may be entering a phase of consolidation. If this is the case, Sterling may well find itself supported at current levels and start to focus on national issues, such as Brexit, where there are still serious concerns.

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