n currency markets, the reaction has been a headlong flight into the supposed safety of the US dollar. Every major currency worldwide fell sharply against the greenback last week, even the Japanese yen. The worst punishment was meted out to oil-dependent currencies, as the crash in oil prices was added to the general atmosphere of fear.

Economic data out this week should begin to reflect the enormous damage wreaked by the pandemic. Eurozone and UK PMIs of business activity out on Tuesday, and US weekly jobless claims on Thursday will likely post the worst numbers in history by some distance. More important for currency markets will be the evolution of the infection in the various countries either already in lockdown or those considering it. The durability of the dollar rally may come into question in the face of far worsening contagion numbers in the US, particularly if the Italian and Spanish numbers cease to worsen.

An unprecedented economic crisis is now upon us. There is reason for hope, however. Monetary and fiscal authorities worldwide are preparing an unprecedented response. Fiscal spending, credit guarantees and liquidity injections on a massive scale are being announced daily. With governments ready to do whatever it takes, the goal of returning to an almost intact economic structure as soon as the epidemic is brought under control may be a reasonable one.

GBP

Sterling was hit harder than the euro last week, in part due to the sudden turnaround of Boris Johnson’s government in admitting that lockdowns may be necessary to contain the virus.

The Bank of England cut interest rates again, and announced £200 billion of extra quantitative easing, as well as programs to provide direct funding to small- and medium-sized enterprises (SMEs). While the PMI numbers on Tuesday will reflect the worst of the crisis, more important will be the announcements during the BoE’s monetary policy meeting on Thursday, which remains on the agenda in spite of last week’s dramatic measures.

EUR

With Spain and Italy on full lockdown and other Eurozone economies subject to increasing restraints, there is no doubt that a sharp recession is coming. However, the aggressive ECB announcement of 750 billion euros to support sovereign debt means that the affected countries will be able to finance enormous fiscal deficits without fear of the markets. Indeed, the collapse in spreads over the last three days is one ray of hope amid the bleak news.

For now, we will be paying close attention to the epidemic numbers out of the different countries and hope that the drastic measures begin to “bend the curve” as soon as possible.

USD

The most basic instinct among currency traders in a global crisis is to flee to the safety of the US dollar, and this pandemic has been no exception thus far. The US rally has been fueled by the fact that Europe has been the worst hit so far, but this may be related to the very limited testing that the US has conducted. In fact, as this is written the US has now become the country with the largest number of new daily cases, ahead of Italy.

As testing ramps up, the numbers will get worse, limiting dollar upside from these levels. More immediately, we await an announcement of the US fiscal stimulus package in response to the crisis, and expect to see the worst number ever of weekly claims for unemployment on Thursday.