National lockdown fears weigh on euro and sterling

Ongoing concerns surrounding the COVID-19 spread in Europe, and last-minute market jitters ahead of next Tuesday’s US presidential election, has sapped risk appetite so far on Wednesday.

The safe-havens have rallied, with most high risk assets losing ground in the past twelve hours or so. Among the worst performing major currencies has been the euro, which sank below the 1.18 level versus the US dollar on Tuesday evening as investors continued to fret over the worsening pandemic situation in the European continent. Both Germany and France are said to be considering month-long lockdowns in order to halt the spread of the virus. French President Macron will be making a televised address this evening, with some media outlets suggesting that he could be set to announce a national lockdown as soon as midnight on Thursday.

While the euro has proved very resilient to the latest virus news, the threat of national lockdowns is beginning to be reflected in a weaker common currency. We think that further losses could be forthcoming should the ECB hint at aggressive action at its policy meeting tomorrow. In our view, the bank will at the very least stress that the second wave of the virus presents a significant downside risk to the outlook and that policy will need to remain accommodative. President Lagarde may also indicate to the market that such action could be on the cards as soon as the next meeting in December, namely both an extension and expansion of its PEPP.

Pound slides as Johnson under pressure for second lockdown

Lockdown fears have also weighed on both sterling and UK equity markets so far today. The FTSE 100 index sank to its lowest level in six months this morning, with the pound already down over half a percent so far today at the time of writing.

According to a Telegraph report late-yesterday evening, some of the UK’s top scientific advisors are said to be putting pressure on PM Johnson to put in place stricter measures, namely another national lockdown. Comments from chair of the UK Vaccine Taskforce that the first generation of vaccine would likely be ‘imperfect’ has also soured risk sentiment and weighed on sterling, which is now trading around its weakest position in a week.

Aside from this afternoon’s Bank of Canada rate announcement, the calendar today is rather light, so investors will be awaiting Macron’s TV announcement this evening and tomorrow’s ECB meeting.

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