The pound rose against the euro during yesterday’s trading for the 4th consecutive day. The pound’s gains can be attributed largely to comments made by Bank of England Governor Andrew Bailey, who on Tuesday suggested the Bank was unlikely to cut interest rates to zero or below for the foreseeable future.
Despite previous comments from the Bank that a move lower in interest rates may be a possibility, Bailey did not sound overly keen on the option. As such, investors have significantly reduced the probability of an interest rate cut, sending the pound higher.
The Bank’s future actions may centre on the UK’s vaccination programme, which has a clear lead over its US and European rivals leading long-term investors to begin backing the UK currency again. Citi Bank, the world’s largest foreign exchange trader sees a bullish medium-term picture for the pound and says it is beginning to see flows into GBP from long-term investors. The Brexit trade deal reached at the end of last year avoided the so-called cliff-edge and has provided markets with confidence in UK assets going forward. The pound is arguably the most sensitive of the G10 currencies, often seeing great swings as investors react to market risk but these longer-term investors will now help underpin a level of support in the pound.
However, it will likely be the UK’s vaccination programme that ultimately drives the pound’s direction and whilst the UK government has gotten off to strong start, there are questions over whether Boris Johnson’s targets can be met. Currently, the UK is vaccinating just below 200,000 people per day but need to average 300,000 per day. The government is rolling out more vaccine locations by the day as it aims to inoculate the most vulnerable in society, and Boris and Health Secretary Matt Hancock remain confident their target can be met by mid-February, which will allow the UK to ease the most harsh lockdown measures and enable some businesses to reopen their doors. UK Covid deaths recently reached a new record high, but the number of infections has begun to drop, suggesting the R rate may have fallen below 1.0 again, confirming the lockdown is working.
With the vaccine offering the only real route out of the Covid pandemic, it is somewhat baffling that European governments have been left so far behind the likes of Israel and the UK in their vaccine rollouts. Even countries such as Germany and Finland that have relatively good records when managing the number of infections and Covid related deaths have fallen behind. Opposition leaders have pointed the blame at state governments, but the EU’s central control must take some of the blame. The EU took too long to get the respective sign off from individual countries, dithered over which vaccines to order, eventually settling on 6 (soon to be 7 vaccines), and has only approved 2 vaccines so far. However, you could argue it is the lack of preparation from national governments and individual health authorities that has been the biggest issue, with many EU governments only using a small percentage of the vaccines available to them so far. National governments simply haven’t grasped the magnitude of the task and this can be seen in Denmark’s credible performance, which whilst part of the EU has inoculated more people than the UK on a per capita basis. In a pandemic, where the only light at the end of the tunnel is the vaccine, the snail pace roll-out will likely mean EU states see longer lockdowns and a slower return to economic prosperity, hampering the euro.
In Italy, a political crisis has erupted after the coalition government of Italian Prime Minister Giuseppe Conte is in disarray after ex-prime minister Matteo Renzi withdrew his support following Conte’s plans for spending €209bn of EU recovery funds, part of the Covid rescue package. The withdrawal of support means Conte no longer has a majority in the upper house and the possibility of a snap election now looms however Renzi has a very low rating in the polls. Italy is currently experiencing its worst recession since World War Two and has more than 80,000 Covid deaths, the highest in the EU now the UK has departed. Current polls show Matteo Salvini’s far-right League and its allies would likely win an election if called now although it would result in another fragmented coalition. Renzi has been criticised as his move has been seen for political gain although despite his actions, there is still scope for Renzi’s Viva Italia party and Conte to resolve this latest dispute.
Eyes turned to Fed Reserve Chair Jay Powell last night who delivered his verdict on the US economy in an online event organised by Princeton Bendheim Centre for Finance. Powell said the US could be back to the old economic peak soon and that some of the damage to low-income people could be avoided as vaccines are rolled out. Powell remained optimistic about the US recovery but noted it will be a different economy when the US comes out of the pandemic. Powell remained clear and concise and said the Fed will let the world know well in advance before they begin to taper asset purchases. Powell also noted a prime objective was a strong labour market and focus would be on returning the US workforce, which he believes can get back to a sense of normality sooner than some fear. Powell’s forecast comes despite latest data which showed an unexpected rise in jobless claims to the highest level in weeks, something Wells Fargo has highlighted as concerning.
President-elect Joe Biden has said his number one priority when he takes office will be to get Americans vaccinated and he has called on Congress to provide immediate financial support to help those that are struggling nationwide. Although with President Donald Trump being impeached for the second time, the Senate trial could slow down the approval of Biden’s rescue package. Biden’s advisors have recently told CNN that the rescue package could cost $2 trillion and Biden has pledged to vaccinate 50 million people with 100 million doses within his first 100 days of office. Currently, more than 385,000 Americans have died with Covid and 10.3 million Americans have been inoculated to date. Biden has called on Congress to free up the money to enable a mass vaccine rollout, a task he sees as the greatest operational challenge the nation has faced.
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