The British Pound on the Ropes
Traders, when investing in a currency, look mainly at the economy and the political system to attempt and predetermine how the currency is likely to perform in the foreseeable future. The UK being the sixth-largest economy in the world, and the pound being the fourth most traded currency, mean the UK’s economy, amongst other elements, are of great importance to traders, specifically those that invest in the British Pound. In this article we will look at how bad the UK’s economy has been affected by the current COVID-19 Crisis.
The British currency has been devaluing for 4 straight weeks against a very weak US Dollar, reached a 4 month high against the Euro and a 10 month low against the Australian dollar. But the question is why is the demand for the Pound so low?
UK economy plummeted by the greatest amount in 41 years
On Tuesday the UK released its Gross domestic product figure which is the measurement of the products and services produced within the country. The GDP is known to be an indication of economic growth, decreasing economic activity and even used to identify recessions.
The figure released was -2.2% which is much lower than the predicted figure of -2% and even compared with the 0% which was the last released UK GDP Figure. Data from the Office for National Statistics showed that the gross domestic product fell by 6.9% in March, even though the government-imposed lockdown only came into force with nine days left of the month.
New evidence found, however, that the closure of bars, restaurants and shops had an even bigger impact on consumers than the Office of National Statistics had estimated. The 2.2% drop was the joint biggest since the third quarter of 1979.
With people unable to spend their wages, the ONS said household consumption spending fell by 2.7% between the fourth quarter of 2019 and the first quarter of 2020. The £9.5bn fall in cash terms was the largest nominal fall on record, with big drops reported in spending on cars, eating out, hotel visits, and clothing and footwear.
The ONS said there was also a jump in the household savings ratio – the proportion of income saved rather than spent – from 6.6% to 8.6% in the first quarter.
Worst Recession in 300 years
Britain’s economy shrank by a record 20.4% from March’s figures in April as the country spent the month in a tight coronavirus lockdown. Since then, the Bank of England (BoE) has advised that a long and slow recovery is likely.
The BoE and the country’s budget office have warned that Britain could be heading for its deepest recession in three centuries this year. The Organisation for Economic Co-operation and Development said that Britain was on course for the worst downturn among all European countries.
The British Pound this week
Throughout the second half of June, we can see the Pound is devaluing faster than other currencies against the US Dollar. In the last 2 weeks, the Pound has devalued by more than 2.5% against the USD. In addition to this, the GBP Currency Index where the value is measured against 6 currencies, has devalued throughout the month of June.
The coronavirus epidemic affected all sectors of the economy, as well as British households, which severely cut spending. However, the weakening of the British currency is somewhat mitigated by statements from Prime Minister, Boris Johnson, who promised to allocate 5 billion pounds for infrastructure projects, which should help revive the economy.
On the positive side, Michael Barnier who is the chief negotiator for Brexit has advised the public on the possibility of a trade agreement between the EU and UK. Even with the news of an agreement the market is still cautious of a new breakout as we have seen in other areas of the globe. Therefore it is also important traders keep an eye on developments around COVID-19.
Throughout the week we also have the release of the UK’s Final PMI Figure which is related to inflation, and also a member of the UK’s Monetary Policy Committee is expected to speak. Both releases are likely to create volatility within GBP currency pairs, UK Stocks and Indices.