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Sterling Under Pressure As UK Awaits New Covid Restrictions

Sterling Under Pressure As UK Awaits New Covid Restrictions

GBP

Sterling was undermined by a sharp slide in risk appetite yesterday as global equity markets declined and confidence in both domestic and global economic recovery slipped. Warnings from key UK health officials over the near-term coronavirus threat was also a negative for the UK currency, especially with expectations that there would be further restrictions on national activity being announced when Prime Minister Johnson addresses the nation later this evening.

Sterling declined to around 1.2775 against the Dollar and 1.0875 against the Euro as further tightening of local coronavirus restrictions including curfews for pubs.

There were further concerns that the underlying recovery will stall which undermined sentiment. Markets will also continue to monitor political developments with a further debate expected over the Internal Market Bill as UK sentiment remains fragile.

 

USD

The Chicago Federal Reserve (Fed) national activity index declined to 0.79 for August from 2.54 for July. There were significant positive contributions from industrial production and employment, although there was a small negative contribution from the consumption and housing indicators.

Risk conditions dominated during the day with the dollar gaining strong support and as equity markets declined sharply. Commodity currencies were an important casualty and the Euro retreated to lows below 1.1750. The dollar overall strengthened to six-week highs before correcting late in the US session.

In comments released before a Congressional appearance on Tuesday, Fed Chair Powell reiterated that the central bank will do what it can for as long as it takes. The path ahead for the economy remained highly uncertain even though many indicators show marked improvement. The US currency faded slightly from its stronger levels as equity markets attempted to stabilise, although the bounce in commodity currencies was weak with the Euro trading near 1.1750 this morning.

 

EUR

In its latest monthly report, the German Bundesbank stated that the German economic recovery may lose some more momentum heading into the year-end. Industrial orders were likely to slow with caution over exports evident while the services sector remained constrained by coronavirus containment measures.

ECB President Lagarde stated that the recovery remains very uncertain, uneven and incomplete. In this context, the uncertain environment required very careful assessment, including developments in the exchange rate. The bank will certainly be relieved if the Euro strength fades. She also stated that the central bank has room to add to stimulus and can adapt if the economy needs additional help.

As of writing, the Euro currently trades around the 1.1740 mark against the Dollar.

 

Data to watch

08:30 – GBP – BOE Gov Bailey Speaks 

15:30 – USD – Fed Chair Powell Testifies

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