Coronavirus, currency and contractors: the impact of the pandemic on exchange rates

The coronavirus crisis has without a doubt been the main catalyst for currency movements in 2020, which is no mean feat in a post-Brexit world.

But just what covid-19 impacts on the world’s leading currencies should UK contractors be aware of, asks Matt Andrews, senior currency analyst at TorFX, and how is the foreign exchange market likely to fare in the uncertain times ahead?

Volatility surges as the world goes into lockdown

While March and the days before the world went into lockdown may seem a distant memory for many of us, it won’t soon be forgotten by investors as they wrestled with one of the most volatile months in currency market history.

At the height of the panic, as the US and many other countries followed Europe into lockdown, we witnessed some particularly dramatic inflows into the US Dollar, which rocked currency markets in mid-March.

During this time, the US Dollar became the undisputed king of the currency market, with the GBP/USD exchange rate shedding 5% in a single day of trade to bottom out at $1.14, while the EUR/USD exchange rate struck a three-year low of $1.06.

This was driven by a flight to safety as well as liquidity fears. The US Dollar’s status as the world’s reserve currency stoked concerns of a USD shortage, as businesses sought to hedge against uncertainty by increasing their cash reserves.

On the other side of the coin, we saw the pound enter free fall in March as GBP investors were unnerved by the prospect of the UK economy facing the twin shocks of the coronavirus crisis and Brexit in 2020. For contractors, these two shocks brought about a delay to private sector IR35 reform but, beyond that reprieve, the silver lining ends. 

Central banks take action

In the face of unprecedented uncertainty and with markets in meltdown, the world’s major central banks were forced to pull out all the stops in a coordinated effort to prop up the global economy. 

The Federal Reserve made several interventions, aggressively slashing interest rates in a series of extraordinary rate decisions, as well as injecting $1.5 trillion in short-term loans to banks to ease liquidity concerns.

At the same time, the Bank of England (BoE) slashed interest rates to a new record low of 0.1%, while the European Central Bank (ECB) announced its Pandemic Emergency Purchase Programme (PEPP) to pump billions of Euros into the Eurozone. The timely action by the central banks helped to rebalance the currency market, curtailing USD demand and reviving the fortunes of the Pound and other risk-sensitive currencies such as the Australian Dollar.

EU’s coronavirus fund and vaccine optimism cheers markets

With global economic activity brought to its knees by coronavirus lockdown restrictions around the world, global growth collapsed in the first half of 2020, with most major economies reporting a record contraction of growth in the second quarter.

Unsurprisingly, this saw investors generally continue favouring the safe-haven US Dollar through the spring. It’s something that UK contractors returning from ‘across the pond’ as contracts ceased would have undoubtedly noticed.

However, USD demand began tapering off going into the summer of 2020, thanks to the lifting of coronavirus restrictions stirring economies back into life. Investors were particularly encouraged by Europe’s stronger-than-expected initial recovery, bolstering demand for the single currency.

On top of this, Euro gains accelerated on the EU’s announcement of a €750bn coronavirus relief fund. The Pound also ticked higher during the summer, spurred on by the UK’s surprisingly sharp rebound in economic activity (the contractor jobs market started its ongoing recovery around this stage too,) and unfortunately some potentially misplaced Brexit optimism.

Meanwhile, a USD selling bias prevailed through most of the summer as hopes for a potential coronavirus vaccine and a startling spike in US coronavirus cases undermined the appeal of the US Dollar.

The ‘new normal’ and the threat of a second wave

Over the past couple of months we have seen markets start to be increasingly driven by factors other than the coronavirus pandemic, with traders becoming accustomed to the ‘new normal.’

Brexit uncertainties are beginning to weigh on the Pound, and the US dollar has rebounded from a two-year low -- timely, considering that the US election is coming into focus.

However, we aren’t out of the woods yet. Health experts in England warn on an almost daily basis that the threat of a second wave of infections remains very real, not helped by the weather starting to get colder.  And on our doorstep, Europe is wrestling with a notable coronavirus resurgence that has seen the Euro start to give ground, just as it coincides with data indicating the Eurozone’s economic recovery has already shown signs of stalling.


Today, most countries are adamant that they will not impose another nationwide shutdown, seemingly because of economic concerns. Yet even localised lockdowns are still likely to stoke considerable currency volatility. This is because such regional lockdowns remain a potential cause of significant economic pain. For example, the Reserve Bank of Australia (RBA) recently acknowledged that the state of Victoria’s extended lockdown could cost Australia up to 2% of GDP!

So while it’s difficult to quantify the level of volatility that lies ahead, given the elevated uncertainty that still clouds the outlook, it seems safe to assume the coronavirus crisis’ lasting impact on the global economy and currency market will be measured by years, not months.

Tuesday 15th Sep 2020
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Written by Matt Andrews

Matt has worked as a currency analyst in the foreign exchange sector since 2016. Over the years he’s commented on the FX impact of major events, including Brexit, the US Presidential election and the 2020 coronavirus pandemic, for a number of online and offline publications.

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