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USD gains heavily as Covid-19 second wave fears grow

GBP - British Pound

Sterling experienced a torrid time over the course of the past 24 hours as markets suffered a strong case of ‘risk off’ nerves. Starting the day above 1.25, GBP/USD fell to lows of 1.2415 as risk sentiment soured and investors sought safety with the main recipient being the safe haven USD. An alarming rise in coronavirus infection rates around the world, with the US recording its second largest increase in new infections since the pandemic began prompted calls for a return to strict social distancing controls.

Investors appear to be finally coming to grips with the fact that the second wave of infections will likely derail the economic rebound as a longer path to recovery lies ahead. A fact evidenced by the IMF most recent review of economic activity. The IMF now expects global output will shrink almost 5%, up from its 3% estimate in April, as advanced economies like the US suffer unprecedented declines in GDP output.

It will now be crucial to keep an eye on the rising number of hospitalisations as this will likely determine whether new extensive lockdowns will have to be put in place and/or reopening stalled further, as we have already started to see in several US states.

In terms of data releases, again UK data is thin on the ground with only CBI Trade survey, due at 10 am. Attention will therefore be on US Jobless claims, durable goods orders and annualised GDP numbers, however, these could well be overlooked as markets focused on Covid-19 second wave fears.

Key Movers

Adding to worsening sentiment was the news that the US will impose tariffs on a range of European goods. Brussels has criticised US threats to hit $3.1bn of European products with additional tariffs as “very damaging”, in the latest sign of growing transatlantic trade tensions. The Trump administration’s announcement announced on Tuesday that it was considering further duties on products ranging from German beer to French sweaters prompted an angry response from the European Commission, which complained that it would further harm companies already reeling from Covid-19.

The US move was the latest step in the two sides’ long-running disagreement over aircraft subsidies. Starting with additional tariffs of 10 per cent on aircraft, which it raised to 15 per cent last February, and 25 per cent on a range of European and British goods
Combined with the IMF growth downgrade and increased ‘second wave’ fears, more riskier currencies such as the Euro, AUD, NZD and CAD all feel sharply against the safe-haven USD.

EUR/USD fell through 1.13 and 1.1250, touching intraday lows at 1.1245, while AUD/USD fell below 0.69 to a low of 0.6851.

Markets will be hoping today's US durable goods orders, jobless claims and GDP number will come in better than expected and provide a respite to the current risk off trading pattern.

Expected Ranges

GBP/USD: 1.2385 - 1.25 ▼

GBP/EUR: 1.10 - 1.1150 ▼

GBP/AUD: 1.80 - 1.82 ▼

GBP/NZD: 1.9250 - 1.94 ▼

GBP/CAD: 1.69 - 1.7015 ▼