The Pound surged versus the Euro on Tuesday, the first day of the UK lock down, as investors brushed off the plunge in UK service sector activity.
Pound versus Euro exchange rate rallied to a peak of €1.0928, before closing up +1.2% at €1.0898.
Today, at 06:30 UTC, GBP/EUR is extending those gains, trading +0.2% higher at €1.0945 despite worsening coronavirus data and as investors look to German IFO sentiment data.
Pound Extends Gains Despite Weak Data
The Pound rebounded in the previous session despite the UK lock down starting and despite dire UK service sector purchasing managers index (PMI). The PMI for the dominant UK service sector, which includes hotels, banks and restaurants, and which accounts for around 80% of the UK economy printed at 35.7 on the index. The figure 50 separates expansion from contraction.
This was a deeper slump than in the financial crisis, as the measures put in place to protect the public from coronavirus have also resulted in demand for goods and services evaporating.
The fact that the pound is advancing despite significant bad news indicates that the news is already priced in.
Today investors will continue digesting coronavirus developments as the number of cases and deaths keep rising. UK inflation data is unlikely to attract much attention given that it is from February and therefore before the virus really started to impact the UK economy.
Euro Slips As Business Activity Collapses
The euro slipped versus the pound on Tuesday following data which showed that business activity in the eurozone crashed to a record low in March. The IHS Markit manufacturing PMI dropped to 40.5 in March, down from 49.5 in February, whilst service sector activity slipped from 51.6 to 31.4, a marked deterioration.
The PMI data is the first widely watched measure showing the economic impact of coronavirus crisis to be published since the outbreak escalated across Europe. The numbers showed how severely the coronavirus is negatively hitting the economy. The data is likely to get worse before it gets better as lock downs in some parts of Europe are only starting now.
Today, German sentiment data for March will be in focus. Analysts are expecting a sharp decline in German IFO Business climate as business confidence drops off a cliff as coronavirus strangles the economy.