UK unemployment released this morning rose to 5%, the highest level since 2015. Despite the sharp fall in economic output, unemployment has remained relatively low due to the furlough scheme which was extended last October.

Whilst the vaccine roll out in the UK has so far been impressive with a reported 400,000 jabs being given over a 24-hour period, the outlook for the British economy in lockdown is not so positive. 

Prime Minister Boris Johnson has said that the latest surge in the new Covid variant may be 30% more deadly. He indicated last week that he was prepared to take further measures to tighten border controls to stop the South African strain from entering the UK. Health Secretary Matt Hancock has said that the South African strain could make vaccines 50% less effective which could ruin the vaccination drive and send the country "back to square one".

UK Purchasing Managers Index data for the services sector dropped in January to the lowest levels since last May falling to 38.8 in January down from 49.4 in December. The low level is the third reading that is below 50 which indicates that most businesses are reporting a contraction in their sector. Chris Williamson, chief business economist at IHS Markit said "A steep slump in business activity in January puts the lockdown UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards. With investors closely monitoring how quickly economies can bounce back, the pound is not immune from any further economic setbacks.

Data is light this week although focus will now shift to the next Bank of England interest rate decision 4th February.

European Central Bank Update Today

ECB Hold Interest Rates

The European Central Bank maintained interest rates at record lows last Thursday but stated that the coronavirus pandemic is still presenting "serious risks" to the EU economy. Whilst the vaccination programme marks a milestone the role out has proven challenging so far. ECB President Christine Lagarde said "In this environment ample monetary stimulus remains essential." It has been reported that Germany has extended its own lockdown measures until at least February whilst the roll out of vaccines across the bloc is already falling behind. To put this into context in both France and Germany less than 2% of the population have received one dose whilst the UK is above 6%. How quickly the Eurozone can recover from Covid-19 is ultimately the biggest driver for Euro exchange rates currently.

US Federal Reserve Meeting

The US Federal Reserve will meet tomorrow for the latest interest rate decision. Whilst no change in rates is expected, Fed Chair Jerome Powell will likely elaborate on how the Fed views the economic outlook for 2021 taking into account the mass vaccination programme and the government's fiscal stimulus. The US is moving quickly with its vaccination programme with over 4% of the population having received a dose so far. President Biden has proposed a further $1.9 trillion fiscal package on top of the $900 billion that was agreed under Trump last year. That guidance from the Fed is likely to impact on dollar exchange rates.

Hopes for a swift UK US trade agreement have lessened following the inauguration of Joe Biden. The Biden administration are prioritising a domestic agenda rather than establishing external pacts at this time. Janet Yellen who has been nominated to become Treasury Secretary signalled that the new President made clear that the US economy needed to be upgraded before more trade barriers were taken down. Whilst much of the work involved for a UK US deal was carried out under Trump's presidency it is now acknowledged that a trade deal may not be possible in 2021. The prospect of such a deal is likely to be a big market mover for sterling exchange rates. 

 

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