The Office of Budget Responsibility released a special report that forecasted a 35.1% decline in UK GDP in the year to June, assuming a 3 month lockdown. There was also a sharp recovery in Q3 forecasted, but overall 2020 GDP growth was liable to shrink by 12.8%. Unemployment was forecast to rise to 10% and the budget deficit would increase to £273bn; 14% of GDP. The IMF also produced a forecast that the UK GDP would shrink to 6.5% this year. Despite all the negative reports, Sterling largely shrugged it off and continued to benefit from healthier global risk appetite triggered by hope major economies werre moving toward exiting lockdown. Overall, the Pound moved higher with commodity currencies despite unease over domestic economic trends.
The Pound registered highs above 1.2600 against a weaker US Dollar and 1.1500 against the Euro. There has been a limited correction at market open this morning as global equity market rallies stalled and expectations of an extended lockdown in the UK. Sterling starts out near 1.2575 on the Dollar and 1.1475 on the Euro.
The US dollar gradually lost traction yesterday, primarily under the influence of increased confidence that lockdown measures would be relaxed soon. As risk appetite remained stronger, defensive demand for the US currency faded, especially with liquidity.
US import prices declined 2.3% for March with a 0.7% annual decline, reinforcing short-term downward pressure on the inflation rate. The IMF forecasts a 2020 US GDP decline of 5.9%. Overall, there was only a limited reaction to economic projections as markets tended to focus on liquidity issues.
As the dollar lost support, the Euro eventually secured significant gains to the 1.0970 area around the European close with the dollar edging lower again later in New York. The Euro was held below 1.1000 and edged lower this morning with the dollar recovering slightly from 2-week lows as commodity currencies retreated.
The latest US retail sales data will be released today with expectations of a sharp 8.0% headline monthly decline for March. There will also be reports on New York manufacturing conditions, industrial production and the housing sector as the Euro traded around 1.0975 in early Europe.
The buying tone around the Euro weakened overnight, reversing any gains made against its U.S counterpart as we begin Wednesday’s trading session. The pair are currently trading just above the 1.9055 having hit a high of 1.0990 late Tuesday evening.
The negative tone may be reversed, as overall market mood has turned somewhat pro-risk this week due to continued improvement in the coronavirus-related numbers in mainland Europe.
On the docket today, inflations numbers for both Spain and Italy are due for the month of March.
Data to watch
12:30 – USD – Core Retail Sales
12:30 – USD – Retail Sales