01/07/2020

Sterling volatility remains


GBP

Sterling remained highly volatile on Tuesday and was affected by worse than expected GDP data. The British economy shrank by 2.2% in the first quarter which was the biggest drop in GDP since 1979. The Bank of England has warned that GDP could have contracted by more than 20% during the first six months of 2020 due to the impact the coronavirus pandemic.

Another worrying sign for the UK is the balance of payments deficit which widened to 21.1 billion pounds in the first quarter, versus a forecast of 15.4 billion pounds. With businesses being closed the inflow of money coming into the UK has declined massively and has led to the currency account deficit worsening.

The pound did make a recovery in the afternoon but analyst believe this was more down to some end of quarter rebalancing rather than an improvement in risk sentiment. The fears of a second wave of Covid-19 is still on the table with Leicester back in full lockdown.

Lastly Prime Minister Boris Johnson announced a plan to fast track an economic recovery by introducing a £5 billion package to improve infrastructure investment and slash property planning rules to revive the economy. This announcement had little impact on Sterling. The risk of a no deal Brexit has now come back on the table as Britain have not asked for an extension to the current deadline, and the deadline to ask for an extension has now passed with little progress made in trade talks.

Key announcements

1:15 – USD – ADE Non-Farm Employment Change
19:00 – FOMC minutes meeting


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