As the rate of infections continues to rise, the news flow is all one-way. And sentiment in the markets is following. But we should not lose sight of the fact that this crisis will pass. Indeed, amid all the negative news, the success in containing the coronavirus in China and other Asian countries is being overlooked. And this is where the coordinated policy response will really matter. Assuming that firms and workers emerge from the crisis relatively unscathed, fiscal and monetary easing should lay the foundation for a swift rebound for the economy.
An economic recovery, when it materializes, is not consistent with the pound at its current levels. A number of factors have prompted the pound’s slump. Demand for safe-haven dollars is one, but the UK’s reliance on the “kindness of strangers” is also important given its large current account deficit.
In our view, the UK will cope no worse than others in the downturn, nor will it miss out on the rebound. Thus, we still think that sterling can trade higher by the end of the year.