The coronavirus continues to dominate headlines and the severity of the situation is having a significant impact on financial markets, which is why we are now seeing wild swings on major currency pairs. Yesterday the World Health Organisation said that the ‘world is in unchartered territory’, these are strong words from an organisation that is notorious for maintaining calm. Major banks and organisations have begun to ban international travel and there appears to be a consensus that the virus could cause disruption to many lives, including the closing of schools and a shift towards working from home. It’s not difficult to see that this is likely to have a material impact on domestic and global growth. The question for us becomes, if all global markets are being affected which currencies are going to bear the brunt?
The answer to that question lies perhaps in monetary policy. The Bank of England has already said they will take ‘all necessary steps’ to support the economy; investors have taken this to mean interest rate cuts, with 50 basis points priced into the market. Dovish investors have suggested further quantitative easing may also be on the table in order to stimulate growth and ultimately offset weak demand. Mark Carney is speaking later today and should give an indication of what the BoE intends to do in the near term, we could see further sterling weakness in the aftermath of his comments. In the US the Federal Reserve have also indicated that they would cut interest rates to protect the economy with a cut up to 75 basis points expected. The Australian Central Bank has also cut rates in order to deal with the impact of the virus. So far, we’ve already seen the dollar weaken considerably with EURUSD moving from multi year lows of 1.0750 up to current monthly highs of 1.1120 in just two weeks. The Eurozone has not indicated any significant shift in monetary policy as yet, primarily because their interest rates are already at 0% leaving little room for further cuts, as such the Euro has remained the strongest performer over the past week trading at 4 month highs on GBPEUR below 1.15.
It appears that we are still in the infancy of the impact of the coronavirus and the true effects may be felt for months ahead.
GBPUSD – 1.2780
GBPEUR - 1.15006
EURUSD – 1.1110
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