The pound has bounced back strongly from lows of $1.15 less than two weeks ago to around $1.24 at the time of writing, and from €1.06 to €1.14.
Moves of this size in either direction are rare and take a particular set of circumstances to be in place for them to occur.
In this instance, the novel coronavirus crisis and the big variations in how politicians in different nations are handling it provide this.
Spring Break is one of those profoundly bacchanalian traditions beloved of coming-of-age Americans. Every year, they descend to beaches all over the southern half of the United States.
A fortnight ago, the pound fell to its lowest level against the dollar in 35 years when it hit $1.15. Now it has risen to $1.23, still quite low, but stronger nonetheless
But even after the coronavirus was confirmed as a pandemic, and people were told to socially distance, some state governors like Florida’s governor Ron DeSantis did not order the beaches to close, potentially putting a vast number of lives at risk.
DeSantis’s actions though, may be due to his political ideology. A recent Pew Research Center survey found that Republicans were less likely to take the coronavirus threat seriously than Democrats.
But this partisan divide may have had another major effect in the last fortnight; the rise in the value of the pound.
As Republican and Democrats have bickered over rescue packages, and states like New York and Florida have instituted new public health measures at different speeds, the dollar has weakened.
The UK government’s comparatively swift response, by contrast, has helped to boost the pound says Viraj Patel, an FX & Global Macro Strategist at Arkera.
‘We can attribute part of the pound’s relative strength – especially against the euro – to the timely and sizeable economic measures put in place by the UK fiscal and monetary authorities’, he writes.
It helped he says that the thumping majority for the Conservatives in the December 2019 general election the UK created a stable working government that can implement new measures quickly.
But the political and macroeconomic institutional framework in the US and Europe has constrained their response. In the US, the Republicans control the presidency, but the Democrats control the House of Representatives, which is responsible for the public purse.
Consequently, getting agreement on stimulus bills to offset the harm from COVID-19 has taken time. Lawmakers did eventually pass a $2trillion package, but only after intense arguments over aid for corporations and hospitals delayed the vote. Investors during that period lost confidence.
The Eurozone is experiencing a north vs south divide over how to respond to Covid-19
The Eurozone is experiencing similar quarrelling, though the split is not so much right-vs-left, but north vs south. Spain and Italy have been overwhelmed by the coronavirus disease, while Germany has seen relatively fewer deaths and less strain on medical services.
To help countries like Spain and Italy, the idea of ‘coronabonds’ has been mooted. So instead of national governments selling their own bonds, the Eurozone would issue debt collectively – basically ‘eurobonds’ with a different name.
However, Europe’s largest economy Germany is heavily opposed to the idea. Along with other northern Eurozone powers such as Netherlands and Austria, they do not want to foot the bill for their Southern European neighbours.
There is a strong feeling among many in the more frugal northern states that the profligate southern states will just take advantage of the cheap borrowing rates offered by coronabonds without putting their financial house in order.
ING’s Chris Turner and Petr Krpata believe that this division is leading to the euro under-performing against currencies such as the pound and the Japanese yen.
‘This suggests investors may prefer currencies where policies can be set by individual governments, rather than requiring a common/mutual response,’ they told This is Money.
There is a strong feeling among many in the more frugal northern Eurozone states that the profligate southern states will just take advantage of the cheap borrowing rates offered by coronabonds without putting their financial house in order
Rabobank’s head of FX strategy Jane Foley concurs with this view. She also points out that this north-south divide the Eurozone has ‘has led to echoes of the Eurozone’s debt crisis.’
She is cautious, though about using the word ‘strength’ with regards to sterling.
‘I would not use the term ‘strength’ to describe the pound. It is far weaker vs the USD and the EUR than it was earlier in the year and massively lower than its levels ahead of the 2016 Brexit referendum.’
She adds: ‘That said, the outlook for EUR/GBP in the months ahead could be heavily dependent on the degree of political coherence (or lack of) in the Eurozone in the coming weeks and months. Dependent on how this story develops it has the potential to significantly undermine the EUR.’
Will the Eurozone and the USA find a way in the coming weeks and months to not only keep the disease at bay but also maintain their financial muscle and keep their currencies strong? It is hard to say at this time.
What cannot be denied though is that in recent weeks, different sides have had significant disagreements about how to combat the coronavirus and that this is weakening certain currencies.
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