The British Pound has fallen against its major peers as investors believe that the trade negotiations between the EU and UK will collapse and result in a no deal Brexit.

David Frost, the UK's chief negotiator, said to Parliament’s Brexit committee that the EU needed to change its position in order to reach an agreement that suits both sides. He told committee chairman Hilary Benn: “It’s their call.”

He also reminded MPs that the government did not intend to extend the transition period. As a result, the pound dropped, with the chances of a soft Brexit now looking increasingly slim. Frost said that Prime Minister Boris Johnson will be meeting in June with leaders in Brussels to try and push trade negotiations along.

Reiterating the rhetoric of hard Brexiters, Frost said that the EU was still grappling with the issue of Brexit: "The EU is still coming to terms with the fact that there's a large country in Europe that doesn't want to be part of the EU's structure in some way, or to work on EU norms, or to relate to the EU as the reference point of its activity.” However, as a Financial Times article put it, it is Brexiters who “still do not understand Europe,” arguing that the UK is “owed” privileged access and that Europeans are treating them “beastly.”

Pound to react to no-deal Brexit

Erik Norland, Executive Director and Senior Economist of CME Group, said that the pound fell against both the Euro and the US Dollar as the two sides reached an impasse regarding the “lack of progress on issues ranging from fishing rights to business-competition regulations." Norland highlighted the pound’s volatility in regards to Brexit:

"Since the referendum, GBP has tended to rally when it looked like a deal was close (+21% versus USD into early 2018 as then Prime Minister Theresa May held negotiations) and tended to sell off when Brexit appears to be headed towards the “no-deal” scenario (-16% when May’s deal was repeatedly defeated)."

He clarified that as we move into the next round of negotiations, GBP options markets are more tilted to the downside. He added: "Moreover, most of the recent spikes in both implied volatility and risk reversal have been motivated by concerns over the progress of Brexit negotiations. The one exception occurred during an incipient dollar-funding crisis in mid-March. After the U.S. Federal Reserve stepped in, that issued was resolved quickly.”

Brexit

As economists attest, the British currency’s volatility will continue and is expected to remain reactive to Brexit headlines, especially through June when the deadline for the UK and the EU to agree to extend the Brexit talks is due. The markets will react favourably to an extension, while the possibility of an impasse and no extension to the December transition deadline will lead to a drop in the pound.

The pound is also expected to react to next week’s final round of negotiations.

As we move closer to Brexit deadlines and Brexit-related news, the pound will continue to be sensitive. If you are worried about currency exchange and the value of the pound when transferring your hard-earned money overseas, get in touch with Universal Partners and their dedicated foreign exchange specialists. You can discuss your currency needs, get the best exchange rates and navigate the uncertainty that lies ahead. Do not let Brexit impact your currency transfers, maximise your currency potential with UPFX.

The uncertainty caused by the coronavirus pandemic has certainly affected exchange rates and increased currency volatility. However, the US Dollar is a safe-haven currency, like CHF and JPY, which means traders have turned towards the USD during the crisis, causing it to move higher. In the short term the outlook for the USD appears to be positive. In the long term, though, the currency is seen as dropping, according to recent analyses. But let’s see more closely what is happening to the USD.

Short-term outlook

For many economists, the buying of safe-haven currencies due to the coronavirus will continue in the coming weeks and will strengthen the dollar. Already, the greenback has been steadily rising through 2020, but rose even higher, outperforming its major peers as global governments struggled to contain the virus, enforcing strict lockdown measures that have unavoidably hurt their economies.

Eventually though, in the longer term, the dollar will decline, according to Georgette Boele, senior FX strategist at Dutch investment bank ABN AMRO. Referring to the dollar’s outperformance, Boele said: "Do we expect this trend to continue? In the near-term (up to 3 months) yes, on the longer-term no.” The dollar will possibly rise higher, the Dutch bank predicts, because traders are overoptimistic about how quickly global economies will recover. Once it is realised how badly global markets have been hit, another wave of selling riskier assets and buying “safer” ones such as the USD will be triggered. As Boele explains: "There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency.”

For Boele, the Dollar will find support in the short term if there is a second wave of coronavirus cases, as investors turn again to safe havens.

Additionally, in terms of Sino-American tensions, any increase of anxiety regarding geopolitics will favour the USD.

While the dollar will not be falling any time soon, it is possible that with the easing of the lockdown measures and the risk of a global recession being averted, the greenback might experience downside pressure. 

Long-term outlook

This is why, as Boele asserts: "After macro and earnings disappointments in the next few months, later this year investors could start to look forward to a strong and durable recovery in 2021. Therefore, over the medium term, investors will shy away from safe haven currencies such as the US dollar and Japanese yen and be open for alternatives.”

As economic conditions improve, the dollar could possibly lose momentum. The US Federal Reserve’s QE programme which has increased dollar supply to respond to the coronavirus pandemic will also add to the dollar’s potential woes. Boele said: "Because of the unlimited QE by the Fed, there is already some more confidence in financial markets. As soon as safe haven demand fades, the Dollar will decline. The QE is simply too large for the Dollar to ignore.”

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The pound was lifted after the release of Markit's preliminary Purchasing Managers' Indexes for May which bounced from April's figures. However, the data is far from positive for many economists as Britain’s economy continued to shrink, suffering its worst contraction for the month of May. According to CBI chief economist Alpesh Paleja, May has been a “pretty awful” month for businesses.

Thursday’s release of data from IHS Markit’s PMI surveys, shows that both the manufacturing and service sectors have been shrinking as the lockdown continues, with signs that the pace of the decline is slowly easing.

The UK Composite Output Index for May was 28.9, up from 13.8 in April, the UK flash manufacturing PMI (May) 40.6, up from 32.9 and the UK services flash PMI (May) 27.8, up from 12.3. While the contraction is slower, still the readings are below 50, which indicates a slow in activity.

Chris Williamson, chief business economist at IHS Markit, explained today’s numbers:

“The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May. Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly falls in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously. Travel and tourism firms, hotels, restaurants and producers of consumer goods such as clothing were again the hardest hit, reflecting virus containment measures, but this remains a shockingly broad-based downturn with very few companies left unscathed by the COVID-19 pandemic.”

Businesses have suffered

With businesses shut during the lockdown, activity has been low, with cancellations of orders and a drop in demand. New employment to UK firms was also low, resembling the record lows of April.

The slowdown shows the stark reality of the coronavirus impact on the economy, which is slightly different than economists’ optimism and expectations of a quick bounce back.

For Neil Birrell, Chief Investment Officer at Premier Miton, the recovery will happen, but is still far away: “The PMI data in from the UK and Europe suggests that the outlook is improving. That is to be expected, as the surveys are taken mid-month and economies were more open than they were in mid-April. But with UK Composite PMI at 28.9, albeit up from 13.8 in April, and the Eurozone Composite PMI reading at 30.5 the outlook is still grim. Markets may well take this as a sign that the nadir has been reached, although recovery is some time off.”

Similarly, Duncan Brock, Group Director at CIPS, believes that a second wave of Covid-19 infections could slowdown recovery. He said that the easing of the lockdown does not signal a clear way towards improvement in the manufacturing and services sectors. He added: “This month saw another steep fall in overall business activity, surpassing for the third time the rates of decline seen during the global financial crisis in 2009. No new orders, premises shut down and furloughed staff unable to return to work were at the heart of the desolation as business struggled to continue with two hands tied behind their back.” Additionally, if job cuts continue and “purse strings will be drawn tightly shut and spending severely curtailed, putting further pressure on the UK economy and ensuring any recovery is many years into the future.”

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Brexit has been instrumental in the pound’s trajectory, responsible for its collapse and slow recovery. The coronavirus pandemic comes to add more pressure to the pound due to the lockdown measures and the ensuing adverse economic effects.

In the short term, as the UK grapples with the threat of Brexit and the coronavirus, the outlook looks extremely negative. But, how will the pound fair in the long term?

What’s happening now?

Sterling has been hit by Brexit and the coronavirus crisis, with the latter making its effects on the British currency very clear in mid-March, when the GBP plunged to levels not seen in 35 years with anxious traders turning towards safe havens such as the greenback. Until the pandemic is over, analysts predict that the pound will continue to be weak. At the moment, Sterling will remain reactive to headlines concerning the pandemic which has triggered the deepest decline in economic activity since 1929.

Indeed, things have changed a lot since last December when traders felt optimistic about Boris Johnson’s decisive victory in the general election, with many expecting significant progress in the Brexit talks and positive economic data.

Now, with the transition period due to expire at the end of the year and the government saying that it will not ask for an extension, the reality looks different, with the possibility of leaving without a deal posing a real threat to the pound’s future. This means that the UK could fall into a recession as economists have warned.

Short-term predictions

Georgette Boele, Senior FX Strategist at ABN AMRO has said: "In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery." Boele added: “There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."

Long-term predictions

Following Brexit, the forecast for the pound has been dire.  As Brexit troubles are not over yet, and as the coronavirus continues to inject fear in investors, the long-term outlook for the pound is definitely bearish.

Since the June Brexit referendum, consumers have underpinned Britain’s economic expansion as businesses stopped investing. Despite the fall in the pound, consumer spending has grown since the vote, and with many businesses now closed due to the coronavirus, understandably, there are concerns for an economy so reliant on consumption.

With the economy hurt due to lockdown restrictions and a lack of exit strategy, the pound will be under pressure for the long term.

GBP: Investors turn bearish

In the Financial Times article “Investors turn bearish on the pound,” Philip Georgiadis writes that investors are anticipating further falls for the pound and have “increased their bets against the UK pound to the highest level of the year, raising the spectre of a new bout of volatility for the currency.” According to the article, “fund managers and other companies betting in the futures market have turned bearish as concerns over Brexit rise in parallel with the damage the coronavirus pandemic is causing the UK economy.”

Similarly pessimistic is Rabobank which says: “Additionally, insofar as no real progress was made on the last round of post-Brexit talks between the UK and the EU and given that the summer deadline for any request for an extension to the transition phase is looming, it is difficult to be optimistic on GBP.”

Analysts at Danske Bank also find that in the coming months the pound will remain under pressure as “Time spent fighting the coronavirus by both the UK and the EU means less time to negotiate a deal before the end of the year, increasing the risk of a big trade shock by 1 January 2021.”

While overly optimistic valuations might fall to meet reality and as such drive the pound lower, there is also the possibility of the British currency strengthening as the global outlook improves. Sterling’s weakness due to global uncertainty could be reversed as nations successfully fight the virus and recover.

What is certain, is that there are no certainties and the pound could easily come under pressure as optimism withers.

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If you have a Sterling transfer, wish to better understand the market outlook or want to discuss your FX needs with a foreign exchange currency specialist, please get in touch with Universal Partners FX.

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The UK economy has shrunk sharply in the first quarter of 2020, according to the Office for National Statistics (ONS). Sterling fell initially, but then stabilised after the British government extended its furlough scheme until the end of October.

GDP

GDP fell 2.0% fall in the three months to March after there was no growth in the three months to February. Particularly, March was a terrible month for the economy, as the GDP dropped by 5.8%, marking the worst performance since the ONS started calculating monthly data back in 1997.

While the UK economy before the Covid-19 lockdown was not faring well, contracting by 0.2% in February, as the coronavirus pandemic started, in March, however, it suffered dramatically. The drop in the first three months is considered to be the biggest quarterly drop in activity since 2008 after the collapse of the Lehman Brothers and the beginning of the global financial crisis.

Yesterday, chancellor Rishi Sunak warned that the UK recession was “already happening”, and that things will not improve in the near future. Last week, the Bank of England forecast that the UK economy might contract by 25% in the April-June quarter, which could be the deepest recession in three centuries.

Decline in Services, Manufacturing and Construction

The ONS reported that in March, with the beginning of the lockdown, the GDP contracted by 5.8% with the services sector shrinking by 6.2% during March, manufacturing output dropping by 4.6% during the month and construction contracting by 5.9%.

The Office for National Statistics explains that there is a close connection between the lockdown measures and the drop in economic activity:

In response to the coronavirus (COVID-19) pandemic, public health restrictions and social distancing measures have been put in place in the UK, leading to a widespread disruption to economic activity. These measures have impacted upon the spending behaviours of consumers as well as how businesses and their employees operate. It has also affected the provision of services provided by government, including health and education.

Services output decreased by 1.9% in Quarter 1 (January to March) 2020, the largest quarterly fall since records began. Production output fell by 2.1% in Quarter 1 2020, driven by declines in manufacturing. Construction output decreased by 2.6% in the first quarter.

According to Jonathan Athow, deputy national statistician for economic statistics, in March, the coronavirus pandemic hit the economy hard, with certain industries such as services and construction declining sharply and others, such as IT support and pharmaceuticals seeing growth.

Key points from the release:

The release reflects the dire effects of the coronavirus pandemic and the economic disruption to various sectors. March was the worst month as education fell by 4.0% due to school closures, wholesale and retail trade and repair of motor vehicles and motorcycles by 10.7%, food and beverage service activities by 7.3% and accommodation by 14.6%. The travelling sector was also hit falling by 23.6% while transport equipment-making declined by 20.5%.

What economists say:

Talking on Sky News, Sunak said that the government was positive and could “emerge stronger” on the other side. He said: “In common with pretty much every other economy around the world we’re facing severe impact from the coronavirus. You’re seeing that in the numbers. That’s why we’ve taken the unprecedented action that we have to support people’s jobs, their incomes and livelihoods at this time, and support businesses, so we can get through this period of severe disruption and emerge stronger on the other side.”

However, Tej Parikh, chief economist at the Institute of Directors, fears that Britain will not “emerge stronger” from the lockdown as he believes that UK firms will remain under pressure:

While countless companies have made adjustments with admirable speed, many will find it difficult to operate at anything like normal capacity under social distancing rules. The furlough scheme has undoubtedly staved off redundancies, and the new flexibility provides businesses a better chance of rebooting.

The Treasury will need to continue innovating to kickstart any recovery. The Government’s loan scheme provided ready cash, but now leaves many firms saddled with debt. Unless this is managed well, it will drag on business investment for long after the lockdown ends.

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British businesses conducting international trade and transferring their funds cross border regularly are increasingly worried about Brexit and the UK’s future relationship with the EU. Boris Johnson has been warned that the current trade talks are failing and that he needs to press the European commission president, Ursula von der Leyen, and EU governments to focus their attention on the negotiations in order to reach an agreement with the British government.

The prime minister has returned to Downing Street on Monday, and he needs to act fast in order to rescue the negotiations before 31 December when the UK will leave the single market and customs union. Both the British government and the EU have agreed that they need to see progress by June, while the UK government has said that there is a possibility to leave the EU without a deal.

The two sides will be meeting again on 30 April. The UK’s chief negotiator David Frost has rejected an extension of the transition period as the government is confident that it can agree on a free-trade deal.

The prospect of no-deal Brexit

However, the prospect of leaving the EU without a deal has become even more real as there are only two rounds of video-conference talks left, while senior figures from both sides agree that delivering a deal is now highly unlikely. An EU official has also noted the added problems of having to communicate online: “You don’t see all the faces of the people around the table; you don’t see the body language, you cannot have discussion in the margins. But having said that, this is how we are working now; we need to make the best of it.”

Last week’s talks have not been progressing successfully either, as there was disagreement between the EU’s chief negotiator, Michel Barnier, and his British counterpart, David Frost. Barnier pointed out that UK officials failed to engage and instead “listened politely” to the EU’s proposals. As he said: “I regret it, and this worries me.” According to the UK, despite their commitments to maintain high standards, the EU rejected proposals regarding the removal of certain trade barriers. Additionally, the UK disagrees with the central role that the European court of justice will play in dispute settlements.

In regards to the issue of Northern Ireland, there are concerns whether the UK will implement the Northern Ireland protocol  in the withdrawal agreement in order to avoid a hard border in Ireland and maintain checks on goods travelling from Britain to Northern Ireland. An EU official said: “You need to have customs checks on goods arriving in Northern Ireland, veterinary controls, a VAT system needs to be put in place.”

UK government not seeking an extension

The UK government has warned EU leaders that they need to change their position if there is going to be a post-Brexit trade deal. The PM believes that there will not be an agreement unless the EU recognises the UK as “an independent state.”

Michael Gove, Cabinet Office minister, has also told MPs that the government will not seek an extension to the transition period, which ends on December 31. He said that extending the period will only force Britain to make a financial contribution to the EU budget which “could be spent on our NHS.” He added that the EU has failed to recognise the UK’s unique status and instead has treated Britain “like the Ukraine,” as if it were a country seeking closer relations with the bloc.

 

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Sterling was under pressure after Friday’s British retail sales figures showed that sales fell in March, despite an increase in consumer goods, particularly alcohol.

This was the biggest fall since 1996 when the Office for National Statistics (ONS) began recording the figures. As Rhian Murphy, ONS head of retail sales said, “Retail sales saw their biggest monthly fall since records began over 30 years ago with large declines in clothing and fuel, only partially offset by strong food sales. The “retail armageddon” as was described by Ayush Ansal, chief investment officer at hedge fund Crimson Black Capital, was a reflection of the Covid-19 pandemic.

The pound has been sensitive to gloomy economic figures but also coronavirus updates, as the foreign exchange market is watching to see how the country deals with the lockdown and how fast it recovers.

UK retail sales: Economists predict further fall in April

Thomas Pugh of Capital Economics noted that the record fall in UK retail sales last month demonstrates that consumption has fallen during the lockdown:

“At one end, there were clear signs the pandemic was keeping consumers away from the high street, non-food sales excluding petrol and online sales were down by 19.4% m/m, with an especially sharp 34.8% m/m fall in clothing sales. And petrol sales declined by 18.9% m/m. Department store sales did rise by 2.8% m/m, but appears to be due to purchases of food and other items online. On the other hand, food & drink sales were up 10.4% m/m (within that alcohol 31.4%!) and online sales (non-department store) rose by 5.9% m/m, as consumers were locked down at home.”

But the fall in March is only the beginning, as economists believe that April will post a bigger fall. Alan Custis, head of UK equities at Lazard Asset Management, says that “the real story will be seen in April’s figures when the lock-down will be fully felt by retailers. Here we expect to see dire numbers, but it must be balanced up by very strong online sales, which we expect will be showing growth in excess of 50% year on year. There have been clear winners and losers and we think this will only become more apparent the longer the crisis continues.”

Consumer confidence at its lowest

Further disappointing stats did nothing to support the pound. On Friday, data from the research company GfK showed that British consumer confidence was at its lowest in April.

The balance of consumers who were considering making major purchases dropped to minus 52 in April, while, the net balance of those expecting their financial situation to improve dropped to minus 14. Howard Archer, chief economic adviser at the consultancy EY Item Club said: “The near-term fundamentals for consumer spending have clearly taken a very substantial downturn as a result of coronavirus. Many people have already lost their jobs, despite the supportive government measures while others will be worried that they may still end up losing their job once the furlough scheme ends.”

Transferring funds?

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A weakening global investor sentiment and a collapse in oil prices has hurt the pound, but the British currency gained slightly on Wednesday despite news that UK inflation fell in March.

Oil

Brent crude oil lost a further 10% in value and WTI crude 5% on Wednesday. The slump in global oil prices demonstrates the massive drop in activity which hasn’t yet been priced by markets. Later on Wednesday, there was a jump in the price of oil, partly the result of a tweet in which President Donald Trump said  that he had “instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.”

Inflation

After the government’s Covid-19 lockdown measures which hit demand for some goods, inflation figures on Wednesday painted a negative image of things to come, as the Office for National Statistics (ONS) reported a 0.2% drop. While this was expected, as consumers spent less on clothing and fuel due to the lockdown, there are concerns that there will be further drops if restrictions continue. The pound could fall further if dire economic data continues, the oil market is further weakened, and investors’ mood drops.

According to the ONS, consumer prices rose by 1.5% per year last month, down from 1.7% in February, which was the lowest since December, as cheaper clothing and fuel pushed inflation down. The ONS explained: “Falls in the price of motor fuels and clothing resulted in the largest downward contributions to the change in the CPIH 12-month inflation rate between February and March 2020. Rises in air fares produced the largest, partially offsetting, upward contribution to change.”

The ONS believes that people avoided shops or stockpiled essential items due to the coronavirus. While the lockdown was officially introduced on 23 March and prices were collected around 17 March, social distancing seems to have shaped consumer behaviours and retailers’ expectations, with less browsing in shops and more time spent indoors.

The inflation report also showed that due to the virus pandemic and failure of the Organization of the Petroleum Exporting Countries (OPEC+) to agree to cut supply in early March 2020, petrol prices fell by 5.1 pence per litre between February and March 2020.

What did economists say?

The drop in inflation in March is just the beginning and demand will continue to wane. Equals Group chief economist Jeremy Thomson-Cook said: “UK inflation stayed steady at 1.5% in March but the wider picture around prices shows that we will not be talking about high inflation for some time. A recession like the UK is currently enduring – we will wait on the data to confirm – naturally will see lower inflation through the destruction of a demand side to the economy whilst movements in oil markets of late show just what can happen to prices when demand dries up. You cannot have inflation without demand and if we are correct that demand rebounds slower than it fell – a Nike tick-shaped rebound – then the impulse into inflation should be low although a weak pound does remain a risk.”

Laura Suter, personal finance analyst at investment platform AJ Bell, says that the drop in oil prices and the change in shoppers’ attitudes will affect inflation: “Even before the recent capitulation, the price of oil was on the slide in March and this dragged inflation down slightly from February’s 1.7% to 1.5%. Oil prices have a massive impact on the UK’s inflation rate and with prices at the pump and home energy costs getting cheaper we’d expect this trend to continue for the next couple of months….What’s more, with retailers having to shut their doors we’re seeing more and more offer discounts to shoppers to move their buying online.”

UPFX

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With the coronavirus continuing to affect the UK economy and the issue of securing a Brexit trade deal persisting, the British Pound is forecast to struggle, with investors’ growing increasingly anxious.

While worries about the coronavirus pandemic overshadowed Brexit temporarily, political concerns return as the government has highlighted its reluctance for a Brexit extension.

Brexit: No extension

With the transition period due to end on 31 December and with only three rounds of trade talks remaining, the UK would need to negotiate a trade deal by December 2020, especially when the government says that an extension would only "prolong the delay and uncertainty" around Brexit.

David Frost, the UK's chief negotiator and Michel Barnier, the European Commission's chief negotiator, after their Wednesday meeting via video conference, agreed on three weeks of talks beginning on 20 April, 11 May and 1 June. In a joint statement, they recognised that their work has helped to "identify all major areas of divergence and convergence", but further negotiations were needed "to make real, tangible progress in the negotiations by June."

But the UK government has clarified that no extension would be asked from the EU, despite recent calls by International Monetary Fund Managing Director Kristalina Georgieva to extend the period for negotiations and not "add to uncertainty" as a result of the coronavirus.

However, the prime minister's official spokesman said: “We will not ask to extend the transition period, and if the EU asks we will say 'no.' Extending the transition would simply prolong the negotiations, prolong business uncertainty and delay the moment of control of our borders. It would also keep us bound by EU legislation at a point when we need legislative and economic flexibility to manage the U.K. response to the coronavirus pandemic.”

David Frost has also similarly clarified the government’s intentions: “Extending would simply prolong negotiations, create even more uncertainty, leave us liable to pay more to the EU in future, and keep us bound by evolving EU laws at a time when we need to control our own affairs. In short, it is not in the UK's interest to extend."

The Prime Minister’s confidence in striking a satisfactory trade deal by the end of the year has been criticised by the opposition, with Liberal Democrat Sir Ed Davey saying that the refusal to extend the transition was "deeply irresponsible."

Concerns have also been voiced by the financial world. Economists and strategists have warned about the risks for the pound and have noted that uncertainty typically has driven investors to sell the pound against every other currency. Analyst at Thomson Reuters Richard Pace noted: “GBP dealers should fear July 1, when it will be too late to extend the Brexit transition past Dec. 31, 2020, and GBP would rightly suffer. The UK government has been vehement about not asking for an extension, and the UK parliament won't be able to force one this time, since Prime Minister Boris Johnson's huge Conservative majority will back his decision."

“Tough Times” for UK economy

It is not only the current uncertainty with Brexit, but also the coronavirus’ effects that will deeply hurt the pound and the economy. Chancellor Rishi Sunak has said that the coronavirus will have "serious implications" for the UK economy, as the Office for Budget Responsibility (OBR) is expecting that the virus will shrink the economy by 35% by June. Sunak said that the government needed to be honest and that the OBR’s figures suggest that the UK is facing “tough times, and there will be more to come.”

While the government is "not just going to stand by" and will try to protect “millions of jobs, businesses, self-employed people, charities, and households," the effects of the lockdown cannot be minimised.

Robert Chote, the chairman of the OBR, said that a three-month lockdown followed by another three months of partial restrictions would see the economy declining sharply, a drop that would be the biggest "in living memory."

The International Monetary Fund has also warned that the virus would cause the UK economy to shrink by 6.5% in 2020, and the global economy to contract by 3%.

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Sterling has risen against both the euro and the dollar benefitting from a drop in the euro and market risk.

Despite news of Prime Minister Boris Johnson’s being admitted to hospital for coronavirus symptoms, which initially hurt the pound, the British currency is now on the increase as the PM is recovering but also as risk appetite is on the surge.

The increase in risk appetite results from the slowing of the spread of the coronavirus in European countries, something that has impacted on the greenback which on Tuesday fell, while riskier currencies rose.

Boris Johnson’s Recovery

Yesterday, Chancellor Rishi Sunak had said that after two nights in intensive care, Prime Minister Boris Johnson was "improving" and "engaging positively" with medical staff at St Thomas' Hospital in London. The PM was taken to St Thomas' Hospital on Sunday after he tested positive for the virus and was moved to intensive care on Monday.

In the meantime, Sunak will be holding a Cobra meeting on Thursday to review the government’s approach to lockdown measures. Due to the coronavirus lockdown restrictions, the meeting will be held online via a conference call and will be attended by ministers and other top government officials.

Cobra stands for Cabinet Office Briefing Rooms and is usually held during national emergencies. In the past, Cobra meetings were held after 9/11 and 7/7 terror attacks, Lee Rigby's murder, 2001's foot and mouth outbreak and 2018’s Novichok attacks in Salisbury.

Today’s review will look at the need for restrictions, which were announced by Mr Johnson on 23 March. According to Sunak, “the review would happen ‘around’ the three-weeks point, which would be based on evidence that will ‘only be available next week’.” He added: "I think rather than speculate about the future, I think we should focus very seriously on the here and now and the present.”

Weak Euro

Sterling’s rise comes as a result of a weak euro after the Eurozone’s failure to agree on a common approach to the economic impact of the coronavirus. It is understood that a joined fiscal response will effectively stop the collapse of the Eurozone’s economy. This is why, many European nations such as France and Italy have requested a “coronabond” in order to secure funding to help those European countries whose economies have been hit the hardest by the coronavirus epidemic.

 The disagreement among European nations is intricately connected to the idea that a coronabond would mean managing the risk of all Eurozone states and would demand richer states such as Germany, Netherlands and Austria to fund it, an idea that they highly oppose to. It is this lack of agreement on how to support member states affected by the virus that is currently testing the strength of the euro.

As Pound Sterling Live reported, “The ability of global governments and monetary authorities to provide fiscal and monetary assistance to their respective economies at this time will ultimately limit the damage inflicted by the virus outbreak, as well as determine how quickly they recover. For markets, this will become a key differentiator between various currencies, with those underpinned by credible policy initiatives likely to outperform.”

Emergency Funding

To combat the effects of the coronavirus pandemic, today (9 April), the Bank of England has agreed to temporarily lend billions of pounds from its emergency overdraft to support businesses and workers.

The so-called “ways and means facility” will enable the government to access a large amount of funds in a short period of time to support the economy and pay for its stimulus programme, while minimising financial distraction.

In a joint statement, the Treasury and Bank said: "The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations."

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