The Bank of England yesterday confirmed that they will once again be holding interest rates at their historic record low. This should come as little surprise owing to global interest rates in the developed world all close to historic lows.
The UK economy once again shrank by 2.9% in January which coincided with the third lockdown. However, according to some analysts this fall was not as bad as previously expected. This has helped give the pound some further support against a number of major currencies.
Bank of England governor Andrew Bailey has also been fairly upbeat about the UK’s recovery potential and was quoted last week as saying he expects the economy to ‘get back at the end of this year to where it was at the end of 2019.’
The central bank has also kept its QE programme at £895bn with another £150bn planned by the end of 2021.
The Office for Budget Responsibility has also downgraded its unemployment expectations to 6.5% compared to the estimate of 11.9% predicted last July. Owing to the continued furlough scheme this is clearly an important factor as to why the unemployment levels are no where near the previous estimate.
According to a statement made yesterday by the central bank ‘the outlook for the UK economy, and particularly the relative movement in demand and supply during the recovery from the pandemic, remains unusually uncertain.’ What is certain however is that most economies worldwide are all struggling with the same issues of when to reduce lockdown and reopen their economies back to pre-pandemic levels again.
Arguably, the pound has seen the benefit of the extraordinarily successful vaccine programme whereby over 40% of all UK adults have now had their first vaccination.
One major factor which I think has been overlooked as to why the pound has continued its gains since the start of the year is that the trauma of a no deal Brexit has now become a distant memory.
Towards the end of last year each time there was a risk of a no deal Brexit the pound would often fall and each time a deal was looking more likely sterling would rise.
Therefore, regardless whether the Brexit deal is good, bad or indifferent the pound has found a lot of support creating some excellent opportunities to buy both the euro and the US dollar.
The euro is continuing to struggle vs sterling and the US dollar as the issue of vaccine take up and supply is causing problems across the continent. Many countries have suspended the use of the Astra Zeneca vaccine and appear to have blamed the UK for lack of support in terms of sharing out the doses. However, this appears to be slightly contradictory as nearly half of the original supplies have not been used yet. The issue appears to be more of a political one and this is causing some uncertainty for the continent and therefore the euro.
The single currency is struggling to make much progress vs the pound and the US dollar recently and the slow speed of vaccinations means that the removal of lockdown could arguably take a lot longer on the continent than that being planned for the UK’s roadmap. With Italy having imposed further restrictions earlier this week owing to increasing infection rates nine regions in the country are under the most tight restrictions.
Yesterday, executive director of European Medicines Agency (EMA) has claimed that the vaccine is’ safe and effective.’ The comments were made in order to try and tempt more Europeans to take the vaccine when offered which has so far been very slow. Combined with the suspension by many European governments as to the risk of the Oxford vaccine it should come as little surprise that those living in Europe may feel a sense of heightened risk when presented with the vaccine.
ECB president Christine Lagarde has suggested that the European Central Bank may need to wait for some time before they see the impact of the recent additional monetary stimulus in the form of QE. A total of EUR750bn was allocated last summer to be used to help the recovery of the Eurozone. Lagarde went on to say ‘while we believe that 2021 will be the year of recovery, we don't see it happening until the second half of 2021.’ This is another reason why the euro has continued to remain under pressure. These comments are also more cautious than that by our own Bank of England governor who appears to be more optimistic about the UK’s recovery.
The US dollar has been fighting back against sterling and the euro in recent times having dropped close to a 3-year low vs the pound not that long ago. The US dollar once again saw some strength this week after the US Federal Reserve suggested that the US economy would grow quicker than previously expected. After a prediction of 4.2% in December they have now revised that figure to 6.5% for this year, which has helped the dollar to recover.
US interest rates have remained on hold and most of the members of the FOMC expect rates to remain the same until earliest 2023.
At this week’s press conference Fed Chair Jerome Powell went on to say, ‘the recovery has progressed more quickly than generally expected… while we welcome these positive developments, no one should be complacent.’
Recent estimates for US inflation have also gone up to 2.4% which is above the bank’s main target of 2%. Typically, if inflation rises then a tool to combat it from going up too much is to raise interest rates. However, owing to the pandemic we would need to see continued higher inflation for the Fed to consider even raising rates at anytime in the near future.
US manufacturing was also given a huge lift with yesterday’s Philly Fed Manufacturing Index, which measured a figure of 23.1 to 51.8 in March. The huge difference also meant that the data saw the prices paid index rose to its highest level since 1980.
Yesterday, was not all good for the US economy as US jobless claims hit 770,000 compared to the expectation of 700,000. Therefore, although the US dollar managed to strengthen against the pound the gains were limited by the early afternoon.
Next Thursday will make very interesting figures when the US will release GDP data for the final quarter of last year. This will be the final revision and will put a ‘line in the sand’ as to how the US performed during the pandemic in 2020. As the world’s leading economy this could cause positive or negative movements for the US dollar depending on what happens with the data so make sure you’re well prepared to move quickly
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