• Joel

GBP Vulnerable as UK Covid-19 Cases Spike

It’s been another choppy week so far for GBP, with the currency frequently buffeted by conflicting headlines regarding developments in and the state of Brexit talks. In sum, an increased sense of urgency is clearly being felt by both the EU and UK and talks have thus been accelerated (and are ongoing right now in London). GBP thus remains relatively supported.

Breakthroughs are yet to be found on the major sticking points (fisheries, level playing field and state aid), and the UK’s self-imposed October 15th deadline for the two sides to reach a deal (or else they will walk from talks) approaches. EU sources say the EU is ready to ignore this deadline, so as the date approaches, further brinkmanship from each side could mean GBP focus remains on the issue of Brexit, and choppy conditions could be set to continue.

However, another domestic issue appears to be going under the radar as far as markets are concerned (although it is very much capturing public imagination in the UK); the issue of fast rising Covid-19 cases in the UK, and the gradual re-imposition of lockdown measures.

Since the end of September, the number of cases being reported daily has skyrocketed, from around 7k per day to a 7-day rolling average of now well above 10k. At this rate, the government thinks that the number of new infections are doubling every 10 days.

Deaths have also been on the rise, but so far by a very modest amount. At still below 100 deaths per day, we are still well below the peak number of deaths being reported per day back in April of 1172. Testing was not as widely available back then, but estimates are than 100k people were catching the virus a day at the peak of its spread.

Deaths are known to have about a two-week lag behind the jump in cases (that was what was seen in the first wave and is being seen in other countries right now). Indeed, a better lead indicator of deaths than number of news cases has also shown an alarming rise of late;

hospitalisations are way up, with some hospitals in the North of England now seeing the same number of admissions as back in the first wave. The UK Health Minister today warned that without further measures, hospitals in the UK face being overwhelmed within 10 days.

As such, further lockdown measures look set to rapidly be brought back in by the government. A three tiered “traffic light” system is reportedly about to be implemented next Wednesday, where worst hit areas will face the harshest lockdown (like the North of England) and areas less badly affected will face softer restrictions (like the South East of England). Scotland has already announced harsher restrictions on its hospitality sector. The UK may follow with similar national rules.

As far as the Bank of England is concerned, a second wave of the virus that again threatens to overwhelm the NHS and triggers harsher lockdown measures is seen as a much greater risk to the economic outlook than the risk of a no deal end to the transition period with the EU.

At this point, with the country unable to afford another full lockdown and the public feeling the effects of lockdown fatigue (i.e. adherence to lockdown rules is pitiful compared to how it was back in March/April), the former scenario almost feels like an inevitability. Meanwhile, the latter scenario increasingly feels less and less likely.

Many analysts/commentators had posited that a no deal exit would be needed for the BoE to decide to go negative with rates. If the economic impact of the second wave is as bad as many fear it will be, that might be all the BoE needs. Hang tight for more stimulus in November in the form of QE, however. 


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