Euro recovery continues as US equity markets sink

The euro continued to claw back some of its recent losses on Wednesday morning, rallying back towards the 1.09 level versus the dollar.

The common currency looks a good bet to post its fourth straight day of gains today, despite the growing number of coronavirus cases reported in the Euro Area. A total of 322 cases of the virus have now been confirmed in Italy, raising concerns that the bloc’s third largest economy could be set to enter into a technical recession in the first quarter of 2020. The number of cases in both Germany and France have also ticked higher in the past couple of days, although these increases have been modest in nature. Europe’s open borders presents a bit of a problem and could hinder containment measures.

As we noted earlier in the week, we think that the move higher in the euro in the past few days indicates that its sell-off was driven more by investors shorting the currency as part of the ‘carry trade’ strategy, rather than due to fears surrounding the virus. So far, European economic data has held up rather well, namely the February PMI figures that showed a move higher in both services and manufacturing activity.

The FX market on the whole has actually continued to evolve in a calm and orderly fashion. We’ve seen a move of around one percent in the yen and a sell-off in the South Korea won as the number of cases there passes the 1,000 mark. Other than that, the impact on most other currencies has been minimal, a far cry from the more than 6% move lower in US equities witnessed so far this week. The Dow Jones index is now trading at its lowest level since early-November.

Fed ‘closely watching’ coronavirus developments

Across the pond, Vice Chair of the Federal Reserve’s rate-setting committee, Richard Clarida, stated that it was too soon to gauge whether interest rates cuts would be required in order to protect the US economy from the coronavirus risks.

While the US economy is usually immune to uncertainties surrounding global growth, given its high low dependence on exports for overall GDP, investors are beginning to fret that even the US could feel the force of the virus’ impact. According to Clarida, the Fed are ‘closely monitoring’ the emergence of the virus, given that the disruption could ‘spill over to the rest of the global economy’. Money markets are now pricing in around a 60% chance of a Fed cut by the end of the year, up from around 40% last week.

Sterling edges higher as investors eye UK budget

News out of the UK continues to be few and far between so far this week.

The pound edged modestly higher yesterday, rallying back above the 1.30 mark versus the US dollar. We think that this is largely a result of a broadly weaker dollar, rather than any catalyst that would send sterling higher. That being said, investors still remain hopeful that increased fiscal spending could be on the way in new Chancellor Rishi Sunak’s first budget, which is due on 11th March. For now, no news regarding Brexit is also good news for the pound.

A GBP/USD exchange rate around the 1.30 level suggests to us that the market is not overly concerned by the possibility of a cliff-edge EU exit at the end of the year and that investors are confident a delay to the transition period is on the cards that would remove the ‘no deal’ scenario.

2020-02-26T10:25:59+00:00 February 26th, 2020|