Besides AUD, CAD, and NZD, the Euro outperforms against the pound with 3.20% monthly and 4.20% in the first quarter of 2020. It is unlikely to sustain at higher levels after a massive 14% gain since mid-February low; that’s what the dollar index USD did. Both have retreated to 50% fibs.
The market was not reacted to the UK’s credit-rating downgrade by Fitch. Last Friday, Fitch Ratings downgraded the United Kingdom to ‘AA-‘from ‘AA.’ The Outlook is Negative. The rating action report highlighted that the downgrade reflects a significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent. And the report also highlighted the lingering uncertainty regarding the post-Brexit UK-EU trade relationship. The American rating agency estimate that the whole COVID-19 response fiscal package will cost 4.4% of GDP in 2020.
- Dickie Hodges at Nomura Asset Management said, “This matters little in light of potential or imminent downgrades of many European sovereign credit ratings.”
Earlier this month, the Bank of England reduced the Bank rate by 65 bps, from 0.75% to 0.1%. The MPC voted unanimously to cut the Bank rate and also voted unanimously for the Bank of England to continue with the bond-buying programme of £200 billion. The MPC also confirmed that, if needed, the MPC can expand asset purchases further.
Data review: IHS Markit released PMI surveys last week, and it wasn’t encouraging. March data highlight that the COVID-19 outbreak has already dealt the UK economy a more severe blow than at any time since comparable figures were first available over 20 years ago, according to the IHS Markit.
- The Manufacturing PMI posted 48.0 in March, down from 51.7 last month. Whereas, Services PMI slumped to its lowest level since the series began in July 1996. This exceeded the previous record low of 40.1 in November 2008, according to IHS Markit.
Chris Williamson, Chief Business Economist at IHS Markit, said, “Historical comparisons indicate that the March survey reading is consistent with GDP falling at a quarterly rate of 1.5-2.0%, a decline which is sufficiently large to push the economy into a contraction in the first quarter. However, this decline will likely be the tip of the iceberg and dwarfed by what we will see in the second quarter as further virus containment measures take their toll, and the downturn escalates.”
The other data, the inflation rate was 1.7% in February, slightly down from 1.8% in January.
Data preview: The week ahead, we focus on Gfk confidence figures and then final GDP.
The Euro has come under renewed selling pressure against the pound since 19 March resulting in EURGBP falling back below 20MA. The cross is now testing key support levels provided by the lows from 13 March at 0.8840. A decisive break below would open up further downside towards the lows recorded between 0.8780 is 19 September 2019 low and 0.8750 its 200MA.
The asset purchases from the ECB and BOE are encouraging up to stick to the bullish forecast.
If the cross starts to move higher, key resistance located at 0.9000 its R1. A decisive breakout through R1 could allow the cross to bounce back towards 0.9050, 0.9170, and 0.9230 levels.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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