The pound slipped on Wednesday, falling back from its monthly highs against the dollar and euro, after a dire global economic forecast from the International Monetary Fund diminished risk appetite broadly, boosting the dollar.
The global economy is expected to shrink by 3.0% during 2020 in a coronavirus-driven collapse of activity that will mark the steepest downturn since the Great Depression of the 1930s, the IMF said.
"It is not (yet) clear whether economies will recover quickly or whether it might take longer than assumed so that we are more likely to see an L-shaped recovery as standard," said Antje Praefcke, an analyst at Commerzbank.
A weakening global economy enhances the safe-haven appeal of the U.S. dollar as it is the major currency in global trade and the predominant medium of exchange in world markets.
Versus a broadly firmer dollar, the pound was down as much as 0.9%, at $1.2514, erasing Tuesday's gains. Against the euro, it fell to 87.38 pence per euro.
The pound has benefited from improved risk sentiment this month as some countries consider reopening their economies, even as experts warn Britain may be on course to become the worst-affected country in Europe. It reached $1.26 in afternoon trading on Tuesday, its highest since March 13.
But this optimism diminished on Wednesday, overtaken by fears about the toll on the global economy.
On Tuesday, Britain's budget forecasters said that the country's economy could shrink as much as 13% this year due to the government's coronavirus shutdown, its deepest recession in three centuries, with public borrowing set to surge to a post-World War Two high.
MUFG's Derek Halpenny said that whether financial markets can absorb the economic downturn without going into turmoil depends on lockdowns easing in time for a strong rebound in the third quarter this year.
"More needs to be done on testing, in particular in the U.S. and the UK in order to reverse lockdowns during May," he said. (Reuters)