Pound resilient despite uncertainty
The Bank of England’s daily Dollar funds auction saw demand by UK financial institutions hit a 2-week high of $5.0bn on Friday, illustrating that there were still important underlying stresses. Bank Governor Andrew Bailey stated that UK companies will require fresh equity, criticised the government loan programme and stated that help needed to be provided faster. Governor Bailey also stated that the government had not yet used its increased borrowing facility with the central bank. The Bank of England is slated to publicise its views on the economic damage during May. The UK government persisted in it’s opposition to extending the Brexit transition period as further uncertainty would have a negative Sterling impact over the next few weeks; talks are due to resume on Monday.
Sterling was largely resilient, tested resistance above 1.2500 on the Dollar and closed near that level with the Euro settling near 1.1500. The British Retail Consortium reported that there had been an 83% decline in the number of people going out to shop, somewhat unsurprisingly. The Pound opens near 1.2450 against the Dollar and the Euro hover near 1.1500.
The Federal Reserve announced that it will slow the pace of bond purchases next week to $15.0bn per day from $30.0bn the previous week which provided an element of dollar support over the weekend, although net purchases are still significantly larger than seen during the financial crisis.
One day after President Donald Trump said that removing shelter-in-place orders is up to governors, he encouraged protests against the lockdowns. He also continued blaming the World Health Organization – despite receiving timely warnings about the coronavirus from Americans in the WHO. He also attacked China. Authorities in Beijing initially covered up the disease while Trump played it down.
The good news from Washington is that Republicans and Democrats are nearing an agreement on further aid to individuals and businesses, following the $2.2 trillion packages. If they announce another substantial stimulus, the market mood will improve, weighing on the dollar and allowing the dollar to recover.
Speculation mounted over the weekend that a number of EU countries could continue to gradually relax lockdown restrictions over the next few weeks. The difficulties however in securing any kind of normality was illustrated by the Austrian government who stated that large scaled events will continue to remain banned until the end of August.
Overall, an anxious tone continues to dominate the market with a continued risk that political divisions between national governments could undermine efforts to support the economy, especially after French President Macron, stating short-term economic damage will continue to intensify.
The Euro remained under pressure trading just above the 1.0860 level prior to the week close. As of writing the Euro finds itself in and around the same level, if not slightly lower as we begin Monday’s trading session.