Euro, sterling weaker on lockdown, recession fears

London

THE euro and sterling are both weakening in the face of ongoing coronavirus lockdowns and renewed economic downturns throughout Europe.

Both currencies are hovering at crucial chart-support levels against the US dollar, Japanese yen and Singapore dollar at the beginning of an expected bleak winter.

Prior to latest lockdowns, several currency strategists believed that the euro would outperform the US dollar.

They are monitoring the charts as a Bank for International Settlements paper contends that algorithm execution trading now accounts for a sizeable proportion of the global foreign exchange market.

From its first quarter low of 1.065 against the US dollar, the euro recovered by 12.6 per cent to 1.20 in August but has since fallen by 3 per cent.

The sterling has been more volatile, jumping by 17.3 per cent from a low of 1.15 against the US dollar to 1.35 in the summer, and is now down by 4.8 per cent from the peak. Similar trends have been evident with the yen and the Singapore dollar.

Despite summer warnings from health authorities that Covid-19 would return with a vengeance, governments in the European Union (EU) have been trying to balance health safety measures with economic recovery policies.

The balancing act was beginning to work in the summer. According to Eurostat's initial estimates, the euro area's third-quarter gross domestic product (GDP) recovered by 12.7 per cent from the slumps in the first two quarters of the year.

The sharpest revivals were in France, which was up 18.2 per cent from the second quarter. In third spot was Spain (16.7 per cent), followed by Italy (16.1 per cent), Portugal (13.2 per cent), Belgium (8.2 per cent) and Germany (8.2 per cent).

Despite the revival, however, the euro zone is still down by 4.3 per cent from the third quarter of 2019, with France 8.7 per cent lower.

Official third-quarter figures for the UK are still to be published but economists are calculating similar trends.

"With Europe dealing with second waves of infections and a new round of restrictions, their recoveries are set to stall," said Kieran Tompkins, chief economist at IHS Markit.

The euro zone and UK purchasing manager indices "have already suffered falls, with the decline in the UK particularly sharp", he said. "Growth in Europe is set to be significantly weaker than in the US over 2020 and 2021."

Brendan Brown of Macro Hedge Advisors believes that both the euro and pound will slide as the European Central Bank and Bank of England will boost quantitative easing, with monetary easing to counter sliding business and rising unemployment.

"In particular, there is much reason to fear that the British pound is set to win the race to the bottom amongst advanced economy monies over the next year," he said.

A key reason is the expectation of a poor Brexit deal that does not adequately cover financial services. The shift of business from the City of London to EU capitals and potential declines inflows of foreign capital into the UK property will not help, added Mr Brown.

Weaker stock markets tend to favour the US dollar but currency markets will be volatile ahead and after the US election, he warned.

Economists are concerned that France and Italy's debt will equal 118 per cent and 158 per cent of GDP next year according to International Monetary Fund estimates.

The EU's 750 billion euro (S$1.19 trillion) recovery fund could help, but it will be difficult to raise it. Economists fear that political and populace discontent are expected to take hold and damage anti-pandemic efforts and economic growth.