GBPEUR traded as low as 1.1315 a new 2020 low early this morning. Meanwhile GBPUSD went under 1.2800 as yesterday’s Bank of England rate cut has seen real money move out of U.K. rates markets as we suggested yesterday. Clearly not good for the U.K. as a whole as a net importer, but offering much better levels for exporters.
RISHI Sunak vowed to "unleash the power of business" with a £12bn package to ‘protect our country and people’ as the coronavirus was officially declared a pandemic by the WHO yesterday. This follows the BOE emergency rate cut yesterday morning and has led to Boris Johnson calling for a COBRA meeting to intensify the efforts to counter the outbreak. What exactly will be discussed is largely unknown. After Monetary stimulus and a shock and awe budget, Johnson is unlikely to announce any major extra fiscal stimulus to combat the virus. However, the likelihood of cancelling major sporting events is on the agenda.
The ECB have found themselves stuck between Scylla, Charybdis and the Coronavirus. Before Covid-19 struck the globe, rates in the EU were deep in negative territory and the Central bank was already embarking on significant Quantitative easing. In the hopes of stimulating their already regressive economy.
The ECB now have 3 options: Cut rates, ramp up QE or do nothing. In all scenarios the assumption is that EUR/USD will fall. Option 1, Christine Lagarde, President of the European Central Bank, decides to cut rates by 10 bps to -0.6%. This would cause far more damage to the commercial banks’ balance sheets rather than stimulate the economy. This option Is the most likely out of the 3 and would be in line with market expectations. Furthermore, Investors would also possibly think that this is the limit of the ECB’s intentions adding more concern and causing the euro to fall dramatically.
Should the ECB ramp up QE and raise the bank’s bond-buying pace we could see the EUR fall as well. Although, there is a chance that this may precede fiscal stimulus form the European government which would likely cause a bounce for EUR/USD.
Finally, to force fiscal stimulus from the government, a viable option from the ECB is to sit on their hands and do nothing in the acknowledgement that monetary stimulus is failing to help the economy.
Over to the US Dollar and US President Donald Trump addressed the nation. He said that he would defer tax payments in the hope of adding $200 billion in liquidity to the economy. He also said that he will provide paid sick leave, restrict travel from Europe to the US (with an exception of the UK and Ireland) and call on congress to provide Americans with ‘immediate payroll tax relief’. Additionally, weighing on the risk-tone could be the fears spread by the CNBC that the US cases could rise to millions.
Worth keeping eyes on the Crude Oil price, as a large US surplus surprised markets and kept the Commodity close to its lows at $30 overnight.
At the time of writing:
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