19/05/2020

Risk appetite boosts sterling


GBP

Sterling made a small recovery against both the EUR and USD yesterday benefitting from an improvement in investor risk appetite. Investors had been reacting to signs of an improvement in the global economic outlook following a decrease in global infections, death rates caused by covid-19, news of a promising vaccine and a commitment by Fed Chair Jerome Powell that the Fed stands ready to offer more support.

The small rally followed earlier comments from Bank of England policymaker Andy Haldane which pressured sterling by admitting the BoE were considering negative interest rates to tackle the economic fallout caused by the coronavirus.

EUR

Sterling’s rally against the Euro didn’t last long as the EUR gained from news that Germany and France have joined forces to push for a €500bn recovery fund that would offer grants to member states hit hardest by the coronavirus crisis. The proposal requires the European Commission to borrow the money on behalf of the EU and spend it as a top-up to the 2021-2027 budget.

Despite making some ground with a proposal yesterday, some member states may take some convincing. For instance, offering grants over loans faces opposition from the likes of Austria and Netherlands who argue that the issuance of a common debt instrument punishes countries that have saved for such a rainy day, and encourages further fiscal mismanagement by those that did not.

Despite the uplift yesterday afternoon, economic concerns remain regarding the Eurozone following comments from the German central bank who predict a significantly lower output in Q2 of 2020.

The Bundesbank warned that despite the easing of some lockdown measures the ‘economic indicators paint a very bleak picture for Germany’.

Key announcements

06:00 – GBP – Unemployment rate – 3.9%
06:00 – GBP – Average earnings – 2.4%
09:00 – EUR – ZEW economic sentiment (May) Germany
14:00 – USD – Fed Chair Jerome Powell speech


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