uch like in the past few days, there has been no real catalyst for the moves in either direction in the common currency, other than broad shifts in market sentiment that have impacted the demand for dollars. With dollar shortage issues now largely addressed by both the Federal Reserve and US government, attention among traders is beginning to turn to what kind of impact the COVID-19 virus may have on the global economy.

Given the rampant spread of the virus in mainland Europe, we think that the Euro Area economy looks set to be particularly hard hit, more so than the US or even Asia. While the US is now the worst affected country in the world with over 164,000 confirmed cases of the virus, as a percentage of the total populus this remains only a fraction of that recorded in the worst affected areas in Europe, namely Italy, Spain and France. The containment measures in these three countries in particular look set to be in place for some time yet, which will of course act to worsen the economic blow.

We have already seen the scale of the downside impact on the Euro Area economy in the March PMI numbers, which will be revised this coming Wednesday. In the meantime, investors will be looking to this morning’s March inflation data to see whether the sharp decline in spending activity has had any impact on price pressure – we think that it almost certainly will have done. Should upcoming data prints in the coming days point to continued weakness in the common currency bloc, we think that further losses for the euro from current levels may be possible.

Investors largely ignore UK credit rating downgrade

Similarly to the euro, the pound was on the back foot this morning, although the extent of the sell-off was relatively limited.

Investors completely overlooked Fitch’s decision to cut the UK’s credit rating to AA- on Friday evening. According to the rating agency, the downgrade was a reflection of the ‘significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak and fiscal loosening stance that was instigated before the scale of the crisis became apparent’. While the massive supportive measures announced by the UK government should help soften the economic blow, it will inevitably dramatically increase the UK’s debt-to-GDP ratio, a development that is likely to be deemed by investors as placing a higher risk premium on British assets. Fitch expects this ratio to rise to around 94% this year, a sizable 10% increase on 2019.

In the absence of any significant new announcements from the UK government or any irregular shifts in the daily virus case numbers, revised PMI data out this week could receive some attention.