These are the best levels we have seen in over a month against the euro. Influencing factors look to be a dampening of political risk in the UK following the local elections and the ongoing economic recovery.
Has demand in the pound risen amongst investors of late? Athanasios Vamvakidis, FX strategist at Bank of America believes so “Following strong demand for GBP early this year, recent flows have been much lighter. Reopening, the hawkish BoE, and the results from last week’s elections, all point to GBP upside, in our view”.
The Scottish National Party failed to secure an outright majority in last weeks local elections, which means there is a very low risk of a second “independence” referendum in the near term. Citi, the world’s largest dealer of FX noted, “there is enough for the bulls as we see a very low risk of a second referendum over the immediate term with focus and price action likely to be dominated by the reflation/reopening/Covid situation in the UK”. Having avoided another Scottish independence referendum has certainly helped Sterling and eased any political uncertainty for the moment.
Now, with the political uncertainty seemingly behind us, the markets have been focussing on the UK’s economy and Bank of England’s positive comments in the recent interest rate decision and subsequent commentary. Last Thursday, the Bank of England announced a reduction in the quantitative easing programme while raising economic forecasts… All positive news on an economic front!
Next week, we see the third phase of economic reopening in the UK, this could provide another boost to the economy with a meaningful return of the hospitality sector, indoor dining, cinemas, and the higher education sector.
ING bank forecast the pound to euro exchange rates to go beyond 1.1750 in the coming weeks.
UK gross domestic product is estimated to have grown by 2.1% in March, the fastest monthly growth since August 2020. The growth started when schools reopened following the harsh winter lockdown, which allowed the UK’s dominant service sector to grow. Recent record-breaking Bank of England predictions for economic growth of 7.25% this year has certainly pricked up the ears of investors. Also, a surge in consumer spending is expected as savings have accumulated during the lockdown period, which in turn should help the economic recovery.
Keep in touch with your account manager for sterling updates, here at Foreign Currency Direct.
There has seen a flurry of positive economic data out in Germany and the Eurozone this week. On Monday Germany released better-than-expected economic sentiment for May, the highest levels they have seen in more than 20 years. ZEW president Achim Wambach commented, “The braking of the third wave of Covid-19 has made financial market experts even more optimistic. In the May survey, ZEW economic expectations reach their highest level in more than 20 years.” He went on to say… “The experts expect a significant economic upturn in the next six months.”
Yesterday morning saw German inflation data come back above forecasts at 2%, which was positive for the euro currency. Germany is the biggest economy in the Eurozone, so when German economic data is positive it can influence the euro currency. On top of this, industrial production figures for the Eurozone came in better than predicted at 1% during March.
Yesterday, the European Commission raised its growth forecasts for the year. Original forecast was 3.8%, which is now 4.3%. A large jump, which will be viewed as positive by the markets. Paolo Gentiloni, the EU economics commissioner commented “The shadow of Covid-19 is beginning to lift from Europe’s economy. After a weak start to the year, we project strong growth in both 2021 and 2022.”
Tomorrow, we have the European Central Bank Monetary Policy Meeting, which could shed some light on current economic conditions and future predictions.
In other news, the European Commission expects to finish work on a Covid-19 certificate which will allow citizens to travel more easily this summer. It will allow those vaccinated or with a negative test to cross borders, which could provide a massive boost to the travel and tourism industries. A two-week pilot began on Monday in a few countries to test the process and technology.
Vaccinations in the EU bloc is gaining momentum with 200 million jabs being delivered and infections falling. Europe is starting to reopen cities and beaches which would provide a welcome boost for economies.
Yesterday, we saw US inflation figures increase in consumer prices during April to 4.2%, which is the fastest since 2008. Why is this important? The more inflation figures rise, the more pressure will be placed on the Federal reserve to raise interest rates. When interest rates rise, this is a sign of strong economic performance which should strengthen the currency in question.
Despite pressure rising on the Federal Reserve to raise interest rates, they have held firm and repeatedly promised patience. However, after the high inflation figures for April, the markets are spooked and concerns have been raised that the Fed is incorrect and policies will need to unwind quicker and ultimately raise interest rates.
Stocks in the US have buckled under inflation worries, tech slumped and Nasdaq losses accelerated.
Ultimately, higher inflation is positive as it is a sign the economy is reopening. It becomes a negative if inflation gets too hot and out of control. The Fed’s inflation target is 2%, so 4.2% recorded in April is way too hot, however will this be short lived and can it be controlled? These are the big questions which will affect the value of the USD!
Jobs data in the US has been positive of late. Record highs in March has seen employers struggle to find workers to fill positions, as reported by the Labor Department on Tuesday.
In the US, 265 million vaccine doses have been administered to date. In the last week alone, an average of 2.16 million doses were administered every day. At this rate, 75% of the population will be vaccinated in the 3 months’ time which is very positive for the US and the reopening of the economy. This will in turn influence the strength of the dollar.
New strains threaten renewed outbreaks and the effect of vaccinations are often outweighed by: virus mutations, seasonality, effectiveness of mask and social distancing.
To stay on top of current inflation worries in the US and how this could affect the value of the US dollar, contact your account manager here at Foreign Currency Direct.
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