Sterling slides after PM’s lockdown announcement

Sterling slipped briefly back below the 1.23 mark versus the US dollar on Monday, down over one percent for the day following Boris Johnson’s speech on Sunday evening.

The Prime Minister’s announcement that lockdown measures will begin to be easing in the UK as of Wednesday provided only temporary support for the pound during Asian trading. The currency instead fell sharply during London trading on Monday amid apparent confusion among some sections of the population regarding the extent of the measures and criticism aimed at the government’s handling of the situation.

While the number of new daily cases of the virus remains relatively high in the UK, it's worth noting that this can at least in part be attributed to the increased levels of testing being conducted in Britain relative to the early stages of the outbreak. A better metric would be the number of new deaths, which yesterday reached its lowest level since 26th March.

The next two or three weeks or so could prove vitally important for the pound. With the lockdown beginning to be eased, investors will be closely watching the latest virus contagion numbers for any signs of a meaningful increase in the rate of spread. Should this be the case, then the path to normalcy will be a slower one, and sterling could be under pressure again.

Aside from the latest virus stats, tomorrow bodes to be an important one in terms of UK economic data, with March industrial production and Q1 growth data set for release. The UK economy is expected to have contracted by 2.5% QoQ in the first three months of the year, despite the lockdown not being implemented until late in the quarter. While this data does of course run on a lag and may be largely overlooked, it should give us a decent indication as to how the economy may perform in Q2 and the height of the crisis period.

Fears of virus second wave keep dollar well bid

Fears regarding a second wave of infections in those Asian countries that have already begun easing their lockdown measures kept the safe-haven currencies, including the dollar, well bid on Monday.

The reemergence of the virus in some small areas of China and South Korea has spooked the market somewhat in the past 24 hours or so, raising fears regarding a second wave of infections and slower rate of recovery in the global economy. While these new pockets of infection are currently small, it has been enough to keep EUR/USD pinned around the 1.08 level so far this week.

With no European data out this morning, the next item on the agenda will be this afternoon’s US inflation data, expected to show a sharp easing in price growth in April amid the lack of consumer spending activity. While ordinarily one of the more important data releases on the economic calendar, this may go largely unnoticed given its now near irrelevance on impacting Federal Reserve monetary policy.