Cutting the UK off from the world due to fear of the spread of a new strain of coronavirus has shaken the financial markets. The lack of agreement on brexit, another lockdown, economic problems – all this could hit not only the British but also the whole European economy.
The flight ban imposed on relations with the UK in the pre-Christmas period is primarily a possible sharp drop in demand for fuels, which seems to hit the oil market immediately. Crude oil prices fell by more than 3 percent on Monday, below 47.5 USD per barrel of WTI.
British Health Secretary Matt Hancock said on Sunday that a new strain of the virus got out of control. France, Germany, Italy, the Netherlands, Belgium, Austria, Ireland and Bulgaria have announced restrictions on travel to the UK. Poland will introduce them on Monday. Prime Minister Boris Johnson is due to chair the Monday emergency response meeting to discuss how to travel and import and export goods to and from the UK.
The British pound market has been hit by a bearish gap after the weekend. During the first hours of trading, the GBP/USD rate continued to fall, by nearly 2%, to 1.3260. This seems to be the biggest one-day fall in the pound since September. The UK has imposed stricter restrictive measures in London and Southeast England, trying to limit the rapid spread of a new strain of coronavirus. At the same time, the lack of progress on the trade agreement after brexit compounded the anxiety as another "final" deadline, which was Sunday, had passed.
Nevertheless, on the broad Forex market we may observe a rapid return of investors to the US dollar. All this seems to be happening with the biggest oversold levels on US dollar index futures since 2011. According to the U.S. CFTC commission, as of December 15, the net long positions fell to -14056 contracts. The last time we saw -15494 long positions was in 2011. This may mean that there may be fewer and fewer investors willing to continue trading on the dollar's decline. Therefore, if investors start to move away from the game of USD decrease, the current pandemic situation may lead to a significant correction on currency pairs with the US dollar.
After the news from the weekend, European stock indices are also falling. British FTSE 100 is down by 1.4%, German DAX seems to be down by 2.3% and French CAC40 by 2.4%. The decreases are limited in the United States, perhaps thanks to the information about the acceptance of an aid package worth about 900 billion USD. The reduction of the main indices in the USA is between 0.1 and 0.4 percent.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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