- GBP/EUR retreats fom 1-month highs

- Market sentiment sours mid-week

- Broader market sentiment to dictate GBP direction

Image © Adobe Images

- Spot GBP/EUR rate at time of writing: 1.1442

- Bank transfer rates (indicative): 1.1142-1.1223

- FX specialist rates (indicative): 1.1266-1.1340 >> More information

- Spot GBP/USD rate at time of writing: 1.2449

- Bank transfer rates (indicative): 1.2113-1.2200

- FX specialist rates (indicative): 1.2300-1.2340 >> More information

The British Pound fell against the Dollar, Yen, Euro and Franc in mid-week trade as global investor sentiment soured, with a slump in oil prices reminding the market that the global economy is in real trouble.

Brent and WTI crude oil prices fell by over 5% at one stage with the WTI crude oil price hit its lowest level since January 2002. Due to the economic slump, oil demand is predicted to fall by a whopping 29 million barrels per day in April alone, according to then latest IEA data.

According to the IMF, 2020 is expected to witness the largest global economic contraction since the Great Depression of the 1930s and while a rebound is forecast for 2021, GDP is expected to remain around 5% below the pre-virus trend.

Aiding the deterioration in sentiment are renewed political tensions between the U.S. and China after the U.S. pulled funding to the World Health Organization (WHO), accusing it of colluding in a Chinese coverup over the coronavirus pandemic. China’s foreign ministry spokesperson Zhao Lijian expressed "serious concerns" with the Trump administration’s decision to suspend funding .

The Pound continues to show a sensitivity to global investor sentiment, rising when stocks appreciate and falling in times of rising anxiety which is an equation that is true for most financial assets in these coronavirus-scarred times.

"The dismal updated economic forecasts by the IMF paint a bleak picture for the UK, predicting the loss of output next year to be above 5% compared with October 2019 forecasts," says George Vessey, a Currency Strategist at Western Union.

"Sterling’s valiant recovery has taken a hit this morning, with GBP/USD down over 0.8%, over 100 pips lower than the high of the day. GBP/EUR has also surrendered a lot of yesterday’s gains, highlighting just how precarious these markets are amid these unprecedented times," adds Vessey.

The stock market rally of the past two weeks has therefore understandably coincided with a rise in the value of Sterling, but there were questions to be asked as to why major U.S. stock indices were once again priced at the same level as they were in 2019. For instance, an investor who bought the S&P 500 in August 2019 would have been in profit on Tuesday, April 14. This despite the IMF warning the global economy is facing its biggest slump since the Great Depression.

Stock markets have unfortunately become an unreliable financial signal as to the state of the economy owing to the efforts of central banks across the world to prop up economic expansion; they have invariably created a risk-free association between stocks and investors, stepping in to underpin asset prices with their financial wizardry.

Above: Chart showing how GBP/EUR has been subject to the same fortunes as the U.S. S&P 500 index.

But one asset that cannot be conned is oil: it is a function of supply and demand. Yes, OPEC can try and manipulate supply but ultimately the kind of demand fall-off caused by the global slump has put prices under pressure again.

On Wednesday we are seeing a situation where oil is signalling to investors that all is not well with the global economy, which is in turn having a feed-back loop into equities which are giving back some of their recent gains.

Declines across the board are unsurprisingly once more stimulating demand for Dollars, and the British Pound is finding itself coming under pressure as would be expected.

Above: Oil prices don't lie.

Antje Praefcke, FX and EM Analyst at Commerzbank says the optimism of recent days could be questioned by the release of official data covering the lockdown periods in the U.S. and Europe, "I fear that the true reality check might yet be to come".

"So far the market has coped reasonably well with the first shockers (above all the US labour market data). But so far these do not reflect the full scope of the "Great Lockdown" recession (IMF). It currently remains open to what extent production and supply chains really will recover quickly, to what extent they will emerge undamaged from the crisis or to what extent they might be damaged," says Praefcke.

Today eyes will be on U.S. corporate earnings, with Citi, Goldman Sachs, Bank of America and Bank of New York Mellon all updating.

Yesterday JP Morgan and Wells Fargo released figures that showed a surge in provisions for souring loans as companies hit financial turmoil owing to the coronavirus lockdown measures.

However, stock markets showed they were unbothered by this latest data, with most global bourses recording fresh multi-week highs. Can today's slew of data shift investor sentiment?

Above: Short-term chart for GBP/EUR

"It currently remains open to what extent production and supply chains really will recover quickly, to what extent they will emerge undamaged from the crisis or to what extent they might be damaged. It also remains to be seen whether consumer behaviour will change sustainably or be reduced permanently. It is not (yet) clear whether economies will recover quickly or whether it might take longer than assumed so that we are more likely to see an L-shaped recovery as standard," says Praefcke.

Under such circumstances we would expect the British Pound to come under pressure alongside the likes of the Australian and New Zealand Dollars. The Dollar and Yen would likely emerge as winners.

"The worst might yet be to come, facing the market with an ice bucket challenge. In that case risk aversion would rise, allowing the dollar to appreciate again," adds Praefcke.

Pound's Rally Against the Euro Still Intact

The Pound-to-Euro exchange rate rallied to reach 1.1515 on Tuesday, which makes for a gain of 8.0% over the course of the past two weeks and looking at the charts, short-term momentum remains positive which advocates for further gains.

Trevor Charsley, Senior Markets Adviser at foreign exchange brokers AFEX, says he imagines the GBP/EUR exchange rate will continue to respect levels between 1.05 and 1.20 over the long-term, but the more immediate outlook could see a further rise by GBP/EUR towards 1.1750, before another dip occurs.

"The market instead looks more likely to coalesce around a fresh pivot point over coming weeks - with supply around 1.1600 or 1.1750 - forcing prices back towards 1.1350/1.1200 again next," says Charsley.

Above: GBP/EUR daily chart

For those readers seeking a more fundamental assessment of Sterling-Euro's outlook, we recommend downloading the latest guide created by Global Reach, which presents the latest consensus forecasts from the world's major investment banks and research houses.

The Pound is currently focussed on global market conditions, which is understandable for a world in which all financial market decision making is now defined by the economic impact of the coronavirus pandemic.

How an asset performs depends on where it sits on the so-called risk scale, with the likes of the Australian, New Zealand and Canadian Dollars being on the 'riskier' end of the scale and benefiting when markets are rising. Meanwhile, currencies such as the U.S. Dollar, Franc and Yen sit on the 'safer' end, tending to rise when markets are falling.

The Pound finds itself on the 'riskier' side of this equation, therefore the recent market environment that saw stocks rally is one that lends itself to Sterling appreciation.

Over the course of the past week the news concerning the coronavirus crisis has started to improve with European nations such as Italy and Spain easing strict conditions aimed at limiting the spread of the coronavirus, which signals to investors that an end-point to the 'Great Lockdown' is approaching.

"Sterling notched one-month highs as risk appetite improved, quenching for now investor appetite for safety in the U.S. dollar. A dearth of U.K. data this week has led the pound to take its cues from global developments. A subsiding of U.K. political risk with Boris Johnson out of the hospital and on the mend translated into added traction for the pound’s recovery from recent 35-year lows," says Joe Manimbo, a foreign exchange analyst at Western Union.

"I get the impression the market is in a state of cautious optimism. In many countries the infections rates are stabilising or even falling. As a result various countries are talking about an easing of the tight restrictions," says Antje Praefcke, FX and EM Analyst at Commerzbank. "The reporting season in the US has started and seems less dramatic than feared. Everything all told these are reasons for the market to display some cautious optimism which is causing the dollar to lose some ground at the moment."

China is allowing two experimental vaccines to combat the new coronavirus for human testing, according to China's Xinhua news agency.

The vaccines are being developed by a Beijing-based unit of Sinovac Biotech and the Institute of Biological Products, a subsidiary of the state-owned China National Pharmaceutical Group in Wuhan.

In March, China had already given the green light for a clinical trial of a vaccine developed by the Chinese Academy of Military Medicine and the biotech company CanSino Bio.

U.S. drug developer Moderna also said in March that it had started human testing for a vaccine.