President Trump’s comments on Friday regarding possible sanctions on China spooked the market at the end of last week, refuelling concerns pertaining to an escalation in the trade war that dominated trading throughout much of last year. EUR/USD lost another half a percent or so during London trading yesterday, briefly edging back below the 1.09 level on this aforementioned broad US dollar strength.

The rally in the greenback in the past couple of sessions would likely have been more pronounced had it not been for the continued encouraging news out of Europe. New daily cases of the COVID-19 virus have continued to ease sharply in the Euro Area, with cases for Italy, Spain and France now at their lowest levels in almost two months. Lockdown measures are also now beginning to be unwound – non-essential shops throughout most of the EU are now either already open or set to re-open within the next week.

As of yet, this trend of easing cases in Europe and still sky-high daily cases in the US has not translated into a meaningful move higher in EUR/USD. Should it become clear, however, that the US is lagging considerably behind the Euro Area in lifting their containment measures, then that uptrend in the common currency may begin to become more evident, in our view.

Will the BoE hint at a QE increase this week?

Sterling edged modestly higher against the US dollar this morning, consolidating some of its sharp losses from Friday. Attention in the UK this week will, of course, remain firmly on the latest daily contagion numbers and announcements from the UK government regarding a possible easing of the lockdown restrictions. The UK government will be holding its three-week review of the lockdown this coming Thursday, although PM Johnson is not expected to make a formal address to the nation until Sunday, which may involve an outline of the exit strategy.

In the meantime, investors will be looking to this Thursday’s Bank of England meeting for any market moving information. The key to the reaction in the FX market is likely to be the bank’s updated macroeconomic projections and comments regarding an increase in the QE programme. Regarding the former, we expect them to dispel the idea of a quick ‘V-shaped’ recovery and instead stress that the path to normalcy will be a gradual one. On the topic of QE, we think that the bank’s communications will keep open the possibility of an increase in the programme at a later date, particularly should the current lockdown remain in place longer than anticipated. A downbeat set of economic projections, combined with no hint of further stimulus, would be the worst-case scenario for the pound and could send the currency sharply lower this week.