Sterling gained in value against almost every major currency during yesterday’s trading session, with the majority of the gains attributed to comments from Bank of England Governor Andrew Bailey regarding economic stimulus and negative interest rates.
Governor Bailey addressed the Scottish Chamber off Commerce yesterday morning and his comments led to sterling strength across the board, most notably with GBP/EUR interbank exchange rates creeping above 1.12 during the course of the afternoon.
Interest rates can be key to the performance of a currency, a higher interest rate can make it more attractive to investors and a lower rate can have quite the opposite effect. With currency markets moving on speculation as well as fact even the mere hint of interest rates moving or remaining stable can tend to have an impact on the value to that particular currency, so due to the comments from BOE Governor Bailey dampening the chance of rates going lower in the short term we saw the pound move upwards.
It wasn’t all positive, he also noted that he believes that unemployment is currently much higher than the figures are suggesting, currently figures suggest UK unemployment is at 4.9% but his suggestion is that a true figure would be closer to 6.5%. A rise in unemployment can be seen as negative for a currency so if unemployment does start to sharply rise then this could be seen as negative for sterling exchange rates in the coming weeks.
It is important to note however that the impact the pandemic is having on economic performance is not localised to the UK, so whilst there does appear to be a little doom and gloom hanging over the head of the UK at present there are a number of other larger economies facing precisely the same issues, if not worse. With the vaccine operation in full swing it does seem like the UK is in a great position to be one of the first out of the traps, so in my view I do feel that the pound has the potential to have a good few months ahead of it, particularly now that a no deal Brexit has been avoided.
The euro yesterday lost value against both sterling and the US dollar as the Covid-19 situation still appears to be casting doubt on when a return to normal will occur. The vaccine role out across Europe has been slow and is considerably behind the UK which has delivered 2.4 million does just under 4% of the population.
These numbers indicate that Europe still has a incredibly long road ahead and this was confirmed yesterday by German Chancellor Angela Merkel. In a statement which frustrated British MP’s Merkel said they need to get a grip on the “British Virus” and that was the reason German deaths and infections are accelerating. Merkel pointed to a strict 10 week lockdown which would see the country closed until April time.
One of the reasons for sterling gains yesterday was the optimism surrounding the speed in which the country could be back open for business, which following Germany's applaud for how they handled the initial wave could see them and the EU counties slow out the blocks. The euro’s losses yesterday show the markets are considering speed of recovery as a key indicator for future performance and where the rate might go.
On a separate note for our clients the Greek Prime Minister Kyriakos Mitsotakis told the European Commission yesterday “it was urgent to adopt a common understanding on how a vaccination certificate should be structured so as to be accepted by all member states”. Whilst many have flouted the idea of vaccination passports this is the first time a country leader has been directly quoted with this as the method to open world travel. If this were to be the case the speed of vaccinations become even more significant and UK residents travelling to the EU are relying on the EU countries to vaccinate much quicker than current rates.
From the euro’s perspective unless much changes in the vaccination path then the single currency could well continue to be under pressure, as sterling especially could start to see some positive momentum with more and more vaccinations taking place.
Pound to US dollar exchange rates rose again yesterday with a high of 1.3670, very close to the 32-month high of 1.3695 seen on with January 4th, with a higher interbank rate not seen since May 2018. The rise this week has been partly attributable to a stronger pound yesterday, where the slightly less chance of stimulus by the Bank of England caused investors to become slightly less negative on sterling.
The real story on the ascendancy of GBPUSD is more down to the weakness of the US dollar however, with the dollar having given up 6% of ground against the pound since the three month low of 1.29 at the end of October when a no-deal Brexit was in sight and markets were uncertain ahead of the US election. The dollar Index which measures the US dollar against a basket of currencies was over 94 at the end of October and early November, but has dropped below 90 as we turned into 2021.
The weakness for the US dollar is a feature of its varied statuses, not just representative of the US economy, but also the world’s reserve currency and a fundamental safe haven. What this means in practice is that having strengthened so much in parts of 2020 because investors sought to buy the US dollar to shield themselves from uncertainty elsewhere because of Coronavirus concerns, it began a process of weakening in the final months of 2020 as the vaccines were approved and a path to more positive and prosperous times were laid and outlined.
Such conditions might not be with us yet, but an underway vaccine program and lockdowns should help case numbers globally in stabilising and whilst numbers are still rising in America, the ability of the vaccines to allow economic activity to resume and pent-up demand to be unleashed, has given investors’ confidence to shed their US dollar safe haven positions and seek more potentially adventurous and rewarding investments elsewhere.
A discussion of the US dollar must nod to the current political situation with Trump facing his second impeachment in the final days of his presidency. The move to impeach Trump whilst legitimate might be more symbolic than anything as an attempt by Democrats to get the last word in this eventful Presidency, and may only provide more ammunition for Trump’s loyal fanbase who made such a brazen display of their feelings last week. The market has generally looked through these political fireworks but next week’s inauguration on the 20th could prove another focal point for protest and confrontation, and may influence sentiment on the US dollar.
For the currency market, the stimulus package on offer by the Democrats is giving hope and optimism which has seen the weaker US dollar. It is also reflected in stock markets breaking fresh records and despite many warnings that stock prices are overinflated, the confidence delivered by a major stimulus package and a successful rollout of the vaccine paves the way for continued optimism and potentially further gains. For the currency market this might lead to a weaker US dollar but there is another concern ahead by the name of inflation.
As economic activity resumes and the stimulus package leads to economic growth, rising prices in the form of inflation might need to be tempered by raising interest rates, and typically, the raising of interest rates strengthens the currency concerned. The great irony of the US dollar ahead is that the factor driving its weakness at present, that of much better economic times ahead and growth ahead, could trigger some policy amendments by the US Federal Reserve (the American central bank), which might ultimately strengthen the US dollar.
On the topic of Inflation, the latest figures will be released today at 13.30 with the year on year levels at 1.6%. Historically the Fed have targeted inflation at 2%, adopting different policies to ensure they hit and stay close to this level. Friday is Retail Sales which could be another market mover, in indicating how the US economy is performing and providing a short term influence on investor sentiment.
Capturing around 60% of globally traded foreign exchange volumes, the importance and significance of the US dollar should always be respected. Bigger movements on the US dollar can strengthen and weaken other currencies, as alternating demand for the ‘greenback’ can drag and push other currencies higher and lower. Speak to your account manager today about how the ever changing world in which we currently live can influence the US dollar, and how that might affect the price of whatever currency exchange you might be considering ahead.
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