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Fragile hopes and disappointing numbers

GDP casts a cloud over sterling

It has not been in a good week for the pound; in the past two days, it has all but given back all the gains of the previous two weeks. It touched a two-week low against the euro yesterday, despite ending last week on a three week high against the central currency. Disappointing GDP figures may have been at the root of yesterday’s losses. Hopes of a V-shaped recovery are receding after the numbers showed that GDP grew just 1.8% in May, against a forecast of 5% and following a record 20.3% contraction in April.

The announcement of the GDP figures has increased speculation that the Bank of England (BoE) may need to take further action to steady the economic ship. Possible actions include the printing of more money or the introduction of negative interest rates. As a result of such possibilities, UK two-year gilt yields dropped to the extent that for the first time, they were below the equivalent JGBs in Japan and the sterling followed suit by falling against a basket of major currencies.

 

Early lockdown in Europe suggests earlier economic recovery

In contrast, the euro had an excellent day, touching a four-month high against the US dollar to reach its highest level since March and approaching its peak this year. The euro also hit a one-month high against the yen and a two-week high against the pound. Hopes of an agreement on the EU economic stimulus package appear to be behind the rise. In addition, as a rise in cases across the US suggest that it has yet to have control over the virus, the contrasting success of the more severe lockdown procedures in Germany, France and Italy in particular are viewed in a positive light that leads experts to believe the economy is well-placed for a recovery.

The relative success of the European approach to the pandemic wasn’t the only thing putting the US dollar on the back foot. A rise in US inflation and a fall in demand due to a rise in coronavirus cases also piled on the pressure. Significant progress in the development of a vaccine was another factor, giving a boost to growth-leveraged currencies including the Australian dollar and the greenback lost out.

 

Business confidence and employment rising in Australia

It wasn’t just rising hopes of an effective vaccine that assisted the Aussie yesterday. The NAB Business Confidence Index rose sharply in June, moving from -20 in May to 1 this month. There is a sense in Australia that the tide is turning; while things remaining challenging in the services sector, weekly payrolls suggest that 35% of lost jobs have now returned and positive trade data from China proved helpful to the Aussie.

However, it’s worth noting that the positive sentiment data were gathered prior to the second lockdown of Victoria and New South Wales and before it was clear exactly how much tensions were escalating between the US and China, raising questions about future trade opportunities. For now, the Australian dollar is riding high but there may be further volatility if these fragile hopes are shattered.

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