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Negative sentiment weighs on sterling

Negative sentiment weighs on sterling


The Pound surrendered early gains after the release of retail sales data as sentiment remained negative amid expectations of a weak underlying recovery, especially given concerns over labour-market trends. The sharp increase in the budget deficit also gave rise to concerns. Just as the chief medical officer recommended the coronavirus alert status be lowered to 3 from 4 news broke that the number of new UK coronavirus cases increased slightly and evidence emerged that the decline in cases has stalled. 

Sterling was undermined by a more fragile global risk tone, the Euro traded below 1.1100 with 11-week highs near 1.1050.The Pound also dropped to monthly lows near 1.2350 on the Dollar. Futures market data recorded a further decline in bets against the Pound which suggested that recent currency losses had not been triggered by hedge-fund selling; which will curb sentiment. Chancellor Rishi Sunak remains under pressure to provide further stimulus with reports that there will be an emergency VAT cut. The government is also expected to announce a further easing of lockdown measures on Tuesday with the social distancing limit expected to be halved. 

The Pound has recovered slightly in the early hours today but negative sentiment has held it below 1.2400 on the Dollar and near 1.1050 on the Euro.



Risk appetite was generally fragile before the weekend as coronavirus developments continued to cause some alarm with Florida, for example, reporting a further sharp increase in new cases to a fresh record high. Equity markets dipped lower following an announcement that Apple was closing some of its US stores once again. The US S&P 500 index declined 0.55% on the day, although there were still gains for the week. 

Federal Reserve (Fed) Chair Powell stated that the US economy will recover, but it will take time and work. Vice-Chair Clarida stated there is more we can do and we will in view that we’re a long way from the Fed’s twin goals. Boston head Rosengren stated that unemployment would be at least 10% by the end of 2020 and considered that further monetary and fiscal support would likely be needed.



The Euro-zone current surplus narrowed to EUR14.4bn for April from EUR 27.4bn the previous month, although there was still a 12-month surplus of EUR334bn and 2.8% of GDP which will provide an element of background currency support. Major central banks, including the ECB, announced that they were cutting back dollar liquidity operations given a lack of demand and underlying improvement in funding conditions.

ECB President Lagarde warned that there are market risks if there is no agreement on the recovery fund. She also warned that second-quarter GDP was liable to contract 13% with a 2020 decline of 8.7% before a 5.2% rebound in 2021. Despite Lagarde’s warnings, there was no agreement on the recovery fund at the EU Summit. This came as no surprise as leaders had warned ahead of the meeting that a deal was unlikely this month. Germany and France are exerting strong pressure for a deal by August. 

As of writing, the Euro trades around the 1.1190level against its US counterpart. 



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