Europe’s Second Virus Wave Triggers Sharp FX Sell-Off

Currencies and equities sold off sharply on Monday as virus cases in Europe hit new record highs. Everyone’s greatest fear this summer was a second wave and unfortunately, that fear has materialized. Spain reported 14,389 new cases on Friday while France reported nearly 13,498 new cases Saturday. These numbers which are far beyond the peaks set back in March triggered a series of tighter social restrictions in Europe’s second and third largest economies. Even Germany which has not seen a significant uptick in virus cases tightened mask and contact regulations in a bid to prevent a broader spread in Munich. In the UK, cases are below their spring peak but doubling every day, leading the country’s Chief Scientific Adviser to warn that there could 50,000 new daily cases by mid-October if further action is not taken.

50K cases a day is not just a risk for the UK, but all European countries experiencing spikes. The problem is that while these cases are higher than where they were in spring, the measures taken by the Spanish, French and UK governments are more localized which raises concern about their effectiveness. Given the severity of the pandemic spread in Europe, more restrictions are on their way for these countries. Considering the economic toll caused by lockdowns in April and May, the second wave poses a significant risk for euro and sterling. Both currencies fell sharply on Monday and we think more losses are to follow with EUR/USD targeting 1.15 and GBP/USD 1.25. Even ECB President Lagarde seems to be concerned as she talked about an uncertain and uneven recovery along with the availability of options if more stimulus is needed. Her most notable comment was on the euro – she previously urged investors not to overreact to its rise but today, she said they are “attentive to the euro’s appreciation,” which is a green light for euro’s decline. For the euro and sterling, aside from virus headlines, the main focus are the PMIs. If this month’s reports show deterioration, we will see further losses in these currencies.

1 2
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.