GBP/USD poking its head up above virus/Brexit-infested waters

GBP/USD is trading at 1.2343 at the time of writing, back into the green for the day despite a spike in the DXY with EUR flows turning negative following a failed EU rescue plan meeting. 

GBP/USD has been trading between a range of 1.2307 and 1.2412 on Thursday in a day where the market was hit with terrible PMIs and stocks tumbling. We are back into the green on Wall Street, but swimming in virus/Brexit-infested waters and barely keeping head above water. The outlook is grim pertaining to COVID-19 and there are serious concerns with nations seeking to get back to work so soon. 

Situation update worldwide, as of 23 April 2020

According to the European Centre for Disease Prevention and Control, since 31 December 2019 and as of 23 April 2020, 2 588 068 cases of COVID-19 (in accordance with the applied case definitions and testing strategies in the affected countries) have been reported, including 182 808 deaths. 

Source: ECDC

As for Europe and America, the stats have been updated as follows:

Europe: 1 130 393 cases; the five countries reporting most cases are Spain (208 389), Italy (187 327), Germany (148 046), United Kingdom (133 495) and France (119 151).

America: 1 005 660 cases; the five countries reporting most cases are United States (842 629), Brazil (45 757), Canada (40 179), Peru (19 250) and Chile (11 296).

As seen, the cases are peaking and hence nations are looking to get their businesses back to work and their economies back on track. In today's data, particularly the European and US PMIs, we have seen a sea of red – worse than feared in fact. 

For the UK economy, like many others, it will be hit hard by COVID-19 and GDP will be well below its 2019Q4 level by the end of 2021. The UK April PMIs saw manufacturing drop from 47.8 to 32.9, and services from 34.5 to 12.3. 

What is very alarming, is that the UK government's deficit is set to skyrocket to nearly 10% of GDP which means that debt will approach 100% of GDP. We are yet to see more from the Bank of England. analysts at TD Securities (TDS) are expecting that the BoE will announce a further £150bn of asset purchases at its August meeting. BoE Deputy Governor spoke this morning as well, and called the current economic contraction "faster and deeper than anything we have seen in the past century, or possibly several centuries."

"We expect a substantial fall in economic activity in Q2, followed by a recovery in H2, leading to a 2.8% contraction in GDP in 2020," the analysts at TDS said. 

"We expect some 20mn jobs to be lost during the lockdown, taking the unemployment rate to over 15%. But we see substantial downside risks if the rise in unemployment is sustained and/or the second cycle of coronavirus forces another shutdown, with GDP potentially contracting by 10% this year."

A toxic cocktail for UK money-markets and GBP

Meanwhile, besides COVID-19, with Brexit in the mix, we will have a sour-tasting toxic cocktail for UK markets.  The broad consensus in EU capitals (and even Westminster itself) has been that the crisis would lead the UK to request an extension to the transition period which is due to expire 31 December 2020. However, noting the recent communications from Downing Street, Brexit is Brexit and the 31 December 2020 is a firm date.  

"The two sides hope to make enough progress by June to press on for the original December deadline. The new COVID-affected negotiations have been whittled down from 9 rounds by June to just 3. This makes any tangible progress doubtful," analysts at TDS argued. 

It is this uncertainty that continues to leave us biased to be short GBP both against the USD and EUR. While Covid-induced weakness and QE are well-worn stories, renewing further Brexit fears into this is not in the price.

GBP/USD levels