Pound Sterling in "Catch 22" Situation on Lockdown Exit, seen Holding Recent Gains vs. Euro and Dollar Today

- GBP softer on the day
- But nearer the upper end of recent trading range
- Broader risk appetite still in charge of GBP
- But a credible exit from lockdown will become increasingly important

Image © Adobe Images

- Spot GBP/EUR rate at time of writing: 1.1499
- Bank transfer rates (indicative): 1.1197-1.1271
- FX specialist rates (indicative): 1.1322-1.1390 >> More information

- Spot GBP/USD rate at time of writing: 1.2453
- Bank transfer rates (indicative): 1.2117-1.2204
- FX specialist rates (indicative): 1.2176-1.2340 >> More information

The British Pound was seen trading in a mixed fashion against the Euro, Dollar and other major currencies on Tuesday with some early losses giving way to gains and in most instances the UK currency remains towards the top end of its recent ranges.

Global markets are softer on Tuesday and this had initially fed into a softer tone for those currencies that tend to display a positive correlation to risk, including then Pound, Australian Dollar and New Zealand Dollar. However, as the London morning progresses we see Sterling is finding a bid with one analyst suggesting the move appears to be without any particular foundation.

"The Pound's been let out for its one hour of exercise today,off on another random walk," says Viraj Patel, Foreign Exchange and Macro Strategist at Arkera.

The Pound-to-Euro exchange rate is quoted at 1.1499, while the Pound-to-Dollar exchange rate is quoted at 1.2453; both rates are still relatively close to where they opened the day.

Should the market outlook deteriorate materially, for any reason, we would expect Sterling to reverse its recent gains, particularly as recent upside momentum has been tepid and we believe this is a currency that could soon be prone to a big move in either direction.

Above: Has GBP/EUR hit a ceiling?

While broader market considerations are in charge of Sterling for now, we also note that markets are increasingly becoming interested in how various economies exit their respective lockdown, with those that are able to steal a march on their rivals and announce an early exit likely to see their currencies rewarded.

On this front the UK and Sterling risk becoming laggards, and markets will likely intently await details, potentially due out later this week, on how the UK Government intends to proceed.

Johnson said the Government's plans will seek to win the "second phase" in the battle to defeat coronavirus, including "refining" the lockdown, and the details of such would be spelt out "in the coming days".

Johnson said the plans would involve "difficult choices" and that he wanted both "maximum transparency" and the greatest possible political consensus at Westminster and with the devolved administrations.

"I want to serve notice now that these decisions will be taken with the maximum possible transparency. And I want to share all our working and our thinking, my thinking, with you the British people," he said, adding:

"I can tell you now that preparations are under way and have been for weeks to allow us to win phase two of this fight as I believe we are now on track to prevail in phase one."

"The Prime Minister could not conceal the fact that an easing of the shutdown is coming soon," says Paul Goodman, Editor at ConservativeHome.

ConservativeHome had believed that the Prime Minister would announce some easing after next week’s May Bank Holiday. "Our reading of his statement this morning is that he wants to get on with it before then," says Goodman.

The British Pound could become sensitive to how the Government goes about exiting lockdown, with a research note out from Deuteche Bank warning last week that the currency stands to lose on a sluggish and poorly executed exit from lockdown.

"The UK appears to be caught in a double whammy. On the one hand, a less developed exit strategy than many other developed economies and question marks over its eventual execution, and on the other an economy that is highly exposed from a sectoral perspective to lockdowns. This should ultimately translate into a relatively harder hit to growth and, on a structural basis, be bearish for GBP," says Oliver Harvey, an analyst at Deutsche Bank.

For now, currencies remain focussed on the broader 'risk on' / 'risk off' response to the coronacrisis, but there is a chance the dynamic could flip and currencies of those countries that exit lockdown sooner, and with more vigour, start to outperform.

Indeed, this could already be in place, with the Australian and New Zealand Dollars apparently outperforming peers as both countries ease lockdown conditions.

For the Pound, a lockdown exit could therefore be an important driver of value in the future.

"Sterling could react to British Prime Minister Boris Johnson's decisions about the UK lockdown and trade negotiations with the European Union," says Robert Howard, an options analyst at Thomson Reuters. "He's in a Catch-22 situation, and so is the Pound. If Johnson is perceived to be either too gung ho or too conservative over exiting the lockdown as he seeks to avoid a second wave of COVID-19 cases while helping the economy, GBP will suffer."

Under existing Government guidelines, the lockdown will be reviewed by May 07.

The government has thus far resisted to spell out an exit plan, insisting that the rate of infections and deaths from covid-19 must display a clear downward trend.

Another 360 people with coronavirus have died in UK hospitals on Sunday according to the latest data - which represents the lowest daily increase in confirmed deaths for four weeks.

A total of 21092 hospital patients have now died in the UK after testing positive for COVID-19, the Department of Health said, but the crucial development is that the death rate is on a clear downward trend, which should allow the Government some space within which to start considering the announcement of measures to ease restrictions.

The Sun reports that the Government's medical advisers are warning that there remain too many 'live' cases of covid-19 in the community to pursue a test and trace programme. Test and trace is being leaned on as a pivotal way of containing the virus in countries that are exiting lockdown, but it is not feasible where testing capacity remains small relative to the infected population.

‘Track and trace’ plan to end coronavirus lockdown still weeks away after it emerges the current number of live cases far too high for it to workhttps://t.co/1lRHnCyPPJ

— Tom Newton Dunn (@tnewtondunn) April 27, 2020

"When we’re sure that this first phase is over and that we’re meeting our five tests: deaths falling, NHS protected, rate of infection down, really sorting out the challenges of testing and PPE, avoiding a second peak, then that will be the time to move on to the second phase in which we continue to suppress the disease and keep the reproduction rate — the R rate — down, but begin gradually to refine the economic and social restrictions and one by one to fire up the engines of this vast UK economy," said Johnson.

"We will be relying as ever on the science to inform us, as we have from the beginning,” added Johnson.

While the Pound is yet to show any significant move either higher or lower in response to the UK's domestic coronavirus narrative, we would suggest that signs that deaths and hospitalisations due the disease are falling, combined with any early announcement of lockdown easing, will remove some downside potential.