Last week, we saw the Euro become the strongest currency of the week amid coronavirus fears across the globe and fearful markets.
The Fed did an emergency interest rate cut (First time this has happened since the Lehman collapse in 2008) which pushed EURUSD up alongside GBPUSD.
The reason why the Euro has strengthened is most traders were in “Carry Trades” on EURUSD, and when the interest rates were cut, the Dollars were sold back into Euros, which gave the Euro a significant push. It is worth noting that if the Bank of England also cut interest rates, the same will happen as many carry trades are done from Euro into Sterling as the interest rate is higher in the UK than in Europe.
Unfortunately, as GBPUSD saw a leg higher, GBPEUR has been getting lower by the day as the Euro has been strengthening, it has now come to a point where any forecasts from January for 2020 have now become obsolete and many strategists are re-jigging their forecasts a lot lower than what was previously expected.
It seems that the world is now preparing for a global recession, lower interest rates, potentially a lot of people not going to work, and employers having to foot the cost of sick pay could lead to some real problems down the road- and according to a lot of research, even if Coronavirus is contained over the next month or so, another bout of it is expected come September/October time. (However, I am not a health expert, so I will not comment any more on this)
The main event investors are waiting for with Sterling is the next BoE rate decision (March 26th)- just a week ago everyone thought a rate cut was almost guaranteed, but it seems the BoE is taking a “wait and see” approach, as the Fed cut hasn’t really done much in the way of stabilising the markets across the pond, so it is doubtful it would have a positive effect here. The problem is, with the reason for this potential cut being one we are not used to dealing with, it is tough to predict whether it will happen or not- my guidance for all Sterling sellers right now is to average in on prices as there is still scope for exchange rates to move lower.
If you would like further analysis please don’t hesitate to contact me, and above all, please stay safe.