The C-word
And we aren’t just talking about coronavirus
There are a number of ways coronavirus has affected economies, shares, production and of course currency markets. From currencies experiencing decreased demand to Asian currencies bearing the brunt of the market’s aversion to risk, the foreign exchange market began to show clear signs of being impacted by the outbreak early in the year.
A recent meeting of G7 Finance Ministers and Central Bank Governors concluded with a statement that the situation was being monitored closely and all were committed and “ready to take action” as required. Different monetary authorities may take different approaches to fiscal stimulus – for some, there is little room for manoeuvre when it comes to cutting rates, other authorities may find that rate cuts have little impact on industries significant to the domestic economy held at a stand-still.
What does the coronavirus outbreak mean for the value of the pound?
As more cases emerge in the UK, it’s possible that a drop in productivity as well as trade will put pressure on sterling. Businesses already facing considerable uncertainty due to Brexit now have fresh challenges which could see problems with trade during the crucial Brexit transition year and problems with rising costs. It’s a difficult balance to strike – shutting down an office helps with containment, which should bring about a swifter end to the outbreak, but it has an impact on productivity. This in turn shows up as a decrease in GDP or lower industry purchasing managers’ indices, which causes the pound to fall.
Euro suffers after outbreak in Italy with cities on lockdown
The challenge for the euro is more significant – not just because of the major outbreak in Italy and forced closures of businesses and schools in some areas, but also because Europe as a whole has a more complex global trade network and much stronger links with China. A decrease in demand for cars from China will have put pressure on the German economy just as the first tentative green shoots of recovery were starting to appear. With interest rates in Europe at the lowest on record, the European Central Bank (ECB) has very little opportunity to make rate cuts but other fiscal measures may be announced to carry Europe through the current crisis.
Stock market shock puts pressure on the US dollar
The US dollar had a prolonged period of strength at the start of the year. As the virus appeared across the globe and the first cases were reported in the US, the stock markets went into sharp decline and this meant a rise in demand for bonds, pushing down yields and increasing prices. This was bad news for the US dollar, particularly coupled with new forecasts showing that annualised growth in both Q1 and Q2 may take a hit. The atmosphere of risk in the market has largely benefited the US dollar to date and it has rebounded from earlier falls, but recent events and the surprise interest rate cut from the Federal Reserve show that neither the US nor the US dollar is immune to the effects of the epidemic.
Uncertainty causes FX market volatility. A currency exchange specialist like moneycorp can provide expert guidance on the markets and a range of specialist tools to manage your money abroad. That’s why we recommend currency specialist moneycorp, a company that has been helping businesses with international payment needs and customers buy property overseas for more than four decades.
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