Despite the continuous ground sterling has gained against a variety of its currency counterparts, it is beginning to ease off and flatline against the likes of the euro and US dollar. Whilst the GBP/EUR figures peaking last week nearing 1.17 and GBP/USD reaching over 1.41 momentarily, the mid-market levels have dropped off their respective peaks a couple of cents and have been holding steady, potentially waiting on further stimulus for any further market activity to take place.
Few things are currently being talked about more than the upcoming budget plans with Chancellor Rishi Sunak to make the announcement at 12:30 today. There has been great speculation as to what this is expected to bring for sterling but there are both contributing factors that have both the potential to move the commodity currency in either direction.
The reason for this is that some of the upcoming plans bring some comfort to the economy whilst others throw uncertainty and caution into the mix. For example, the stamp duty holiday is set to be extended until the end of June – a factor that should continue to help keep economic activity high. The same is potentially going to be occurring for the furlough scheme which is currently assisting the 6m people who are receiving 80% of their salaries from the government which has meant that the recent increase in unemployment has only moved marginally from 5% to 5.1%.
However, these measures have to come at a cost in the future in the form of taxes. Sunak is planning to unveil tax hikes later on this year for corporations with the current 19% level expected to rise to 25% whilst council tax increases to come in April could be an additional 5%. Ultimately, be it in the near-term or potentially later on this year, the government will need to find ways of filling the 9.9% GDP contraction that the UK experienced last year.
With a lot of changes to take place today, there may be every possibility that it may take the currency market some time to react to which direction the markets will move in. Irrespectively, it would definitely be worth getting in touch with your account manager this morning to discuss your upcoming transfer requirements.
A good question worth asking yourself if you are looking to buy euros with pounds soon; is the risk of potential adverse market movements worth it considering the market has already gained 4% for you since the start of this year?
The main talking point regarding the single currency’s strength unsurprisingly relates to the sluggish vaccine rollout within the eurozone. The recently departed UK has been praised for how quickly it has released its plethora of vaccines to the rapidly increasing amount which now resides at 21 million. Yet, it has taken far too much time for the bloc to give approval for the vaccines to be released. To get an understanding of the difference in vaccination speed, the below graph from Euronews shows the comparison of the UK to the EU at present figures.
The two keys countries to note are Germany and France who have some of the largest EU populations but also the powerhouse of economic activity within the eurozone. Germany is having troubling issues of its own with a lot of the German population refusing to take the vaccine and urgent government intervention will be needed to increase acceptance of the vaccine.
Until the ball starts rolling on this with a more substantial pace, economic recovery and the possibility of reopening out of lockdown becomes a much slower process. For this reason, the pound could well continue to benefit out of this situation.
From a data release standpoint, Germany also saw its retail sales figures yesterday which came in at an 8.7% contraction following from 2.8% growth last month. Europe as a whole also saw its Consumer Price Index (CPI) fall on Tuesday from 1.4 to 1.1 suggesting further signs of currency degradation moving forwards.
Coming up later today, the bloc also sees its retail sales figures as a whole with the previous 0.6% expected to fall as well to -1.2%. Next week does not promise to provide any comfort for the euro either as EU GDP comes in on Tuesday with the Q4 revival expecting to place somewhere around a 0.6% contraction. The only other event worth noting is the interest rate decision on Thursday but just like the UK, are expecting these to remain unchanged with the levels to stay at 0%.
Whilst USD/GBP has seen levels crept towards a 3-year low not seen since 2018, the USD/EUR has also not been faring too well either. 2020 saw continued weakness for the most globally traded currency and despite recent months having levelled off somewhat, the near parity levels of 1.06 we saw when the pandemic fully took off are very far from the 1.21-1.23 levels we are accustomed to seeing currently. However, a lot of the reasons that hold these two currencies back is contrived from the same reason – surging coronavirus cases. Having mentioned the issues Europe face in the section prior, the US has by and large the most COVID-19 cases in the world topping around 30mn cases and more than 500k deaths.
With the Trump administration having failed to sufficiently vaccinate the general public, the task has now been appointed to Joe Biden who looks to step up the vaccination acceleration but has a long way to climb before they are on the right tract. This will mean that for the time being, financial recovery to the pandemic may be just as slow as in the EU and will continue to weigh heavily on US dollar exchange rates.
Data releases will be relatively light on the ground this week but the back end of the week seems to provide more possibility for USD volatility. Fed chair Jerome Powell will make a speech on Thursday regarding the outlook for this year and expected events to come whilst Friday will bring the US non-farm payroll. This may provide a needed lift for the USD as the previous 49k new jobs to the market is anticipated to gain 180k, suggesting employment and job security are slowly returning to the markets.
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