The UK’s efforts to roll out the Coronavirus vaccine has helped the pound steadily gain throughout the start of 2021, with over 9 million people now receiving at least their first jab.

The vaccine rollout in the UK has been considerably more successful than in Europe so far, and optimism around the chances of this meaning the UK economy can ‘reopen’ faster than in Europe has helped GBPEUR soar to these favourable levels.

Despite the current lockdown measures in place across the country, urgent testing has been rolled out in parts of the UK this week for a new South African variant of the virus which is thought to be highly contagious and potentially reduces the effect of a vaccination. There’s no evidence that it is more deadly, but it will likely have an impact on case numbers and the timing of restrictions being eased if it leads to a higher number of cases.

Bank of England Interest Rate hike?

Bank of England Interest Rate Decision

There are fears that the pound’s advances since the beginning of the year could come to a halt this week, with the Bank of England’s latest interest rate decision looming on Thursday. The UK base rate set by the BoE is 0.1% and leaves very little room for an interest rate cut. There are concerns however that negative interest rates are on the horizon if not in this week’s announcement, then potentially later this year. When quizzed on the potential of negative interest rates towards the end of 2020, BoE Governor Andrew Bailey stated that it was an option “In the box of tools” in the bank’s armoury for boosting inflation.

If there is a rate cut announced on Thursday, or there are hints to the likelihood of the event in the coming months, it is likely sterling will weaken later this week. Lower or negative interest rates could mean that consumers are charged on their savings held in sterling, which would likely deter investment into the currency and prompt investors to look for higher returns in alternative currencies. Keep in contact with your account manager here throughout the week to stay up to date with all the latest market movements.

EU Q4 GDP Data Release

In stark contrast to the success of the UK’s vaccination programme so far, there have been major delays across Europe which has led to th introduction of export restrictions being put in place by the EU and this has seen the single currency struggle against GBP and USD. It is likely that the progress of vaccination rollouts will continue to impact the currency market over the coming weeks and months and whilst the UK stays ahead of Europe, it is likely this will support sterling value.

Today sees the release of Q4 GDP figures from across the Eurozone and will give an overview of how the bloc has performed through the pandemic. At the end of last week, three of the blocs largest economies, Germany, Spain and France all posted better than expected Q4 GDP numbers, and it will be interesting to see if this morning’s figures from the Eurozone as a whole mirror this. Despite this more positive end to the year, there are still concerns that the recovery in Europe isn’t as strong as in the US and China and that restrictions measures and the poor vaccine roll out could lead to a double dip recession. The ECB have projected a 7.3% drop in GDP for 2020 compared to a 3.5% contraction in the US and 2.3% growth in China.

Other data of note this week includes inflation data and retail sales figures numbers which will also give good insight in to how the bloc is performing. Inflation in particular will be looked at closely by the ECB when they decide future monetary policy and Christine Lagarde stated after their last interest rate decision that “We continue to stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner.” It is likely that Thursday’s interest rate decision from the Bank of England, coupled with this week’s data from the Eurozone could result in a volatile week for GBPEUR.

Flood of US Economic Data This Week

USD Supported by GDP Data

USD exchange rates ended the month on a slightly more positive note on Friday, with the US economy shrinking by less than had been initially anticipated in 2020. The economy shrank by a total of 3.5% which is a better performance than many other major economies, particularly when you look at the UK which saw a 10% shrink last year.

Paul Ashworth, chief US economist at Capital Economics has said US growth "was still down by 2.5% on a year earlier, but that still represents a much faster recovery than we would initially have expected given how grim things looked in mid-2020. With effective vaccines offering the possibility of a return to normalcy later this year and the Biden administration intent on more fiscal stimulus, we think GDP growth will be as high as 6.5% this year."

In a bid to help the economy bounce back from the pandemic, President Joe Biden has proposed $1.9tn in spending and support packages, targeted mainly at the vaccination rollout, testing and supporting those hit by the extremely high levels of unemployment due to the current restrictions. However, at the start of this week Biden has faced some resistance from Congress, where there is concern about the high cost of his proposition. One measure in particular that has raised concerns is paying a lump sum to individuals hardest hit by the current climate, and Congress are calling for a more targeted approach.

There is a raft of data releases due from the US this week that could have an impact on USD value, particularly unemployment numbers and Service PMI data. There are huge concerns over the number of people currently filing for unemployment across the US and the initial expectations are for these numbers to continue rising this week.

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