It was an impressive day yesterday for European economic data releases as European including French and German Markit Services and Manufacturing numbers all exceeded expectation. Market manufacturing and Services numbers are extremely important as they both capture business conditions within that sector. Therefore, the numbers show that the European Economy may bounce back from COVID-19 quicker than expected. Throughout yesterday’s trading period the euro to pound rate increased close to similar levels that we saw three months ago.
Boris Johnson Eases the lockdown, but Sterling Remains Under Pressure
Yesterday afternoon UK Prime Minister Boris Johnson announced that the UK would be easing the lockdown and adjusting the 2m social distancing rule to 1m+ as the science supports it. This means as of the 4th July, the hospitality sector will reopen and people within England only will be allowed to get their haircut and enjoy a pint at their local. This can only be a good thing for the UK, as people will return to work and the economy will start ticking over once more. However, the major concern for sterling is a second wave. We have seen around the globe in places like China and Germany, that second waves are likely, and if the UK have to go into full lockdown once more you would expect the pound to weaken further against the euro. It was only this morning that health leaders according to the BBC are ‘calling for an urgent review to determine whether the UK is properly prepared… for a second wave’.
Why Has Sterling Fallen so Much Against the Euro?
Two of the main reasons why the sterling has dropped against the euro is the ongoing Brexit saga and the UK economic data that has been produced. The UK have made it clear that they will not extend the trade talks past the end of the year, therefore the chances of crashing out of the EU have increased. It’s important to understand that the deadline for extending the Brexit negotiations expires at the end of the month.
Regarding economic data, growth fell by over 20% due to the pandemic and releases such as inflation and retail sales have left investors with a sour taste in their mouths. The upcoming weeks will be important now that the UK has eased lockdown measures. These numbers will have to improve if sterling wants to reverse the losses we have seen in recent weeks.
European & UK Data Release to Finish the Week
A key data release to look out for tomorrow is the European Central Bank’s Policy meeting accounts. This document provides a good overview of the financial market, economic and monetary developments. If there are any bits of information that surprises the market, this could cause movement for the euro. In addition, the UK is set to release its latest Bank of England (BoE) quarterly bulletin. With the BoE making the headlines recently, this report should spring no surprises but it’s one to keep an eye on.
In other news the International Monetary Fund is set to provide an update at 14:00 today. Previously they reported that the world output would fall by 3% due to COVID-19, which was back in April. A lot has happened since, therefore this meeting could be significant. If they believe that the world output is set to fall more than 3%, we could see the safe haven US dollar gain in value as a result of the demise of the euro. If that was the case, you may see a fall in EURGBP exchange rates
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