The pound started this week on the backfoot against a basket of currencies including the euro and US dollar due in part to the continuing implications that the threat of COVID variants could still have on the weakened UK economy.
GBP/EUR saw it’s lowest levels in 3 weeks having dropped off more than half a cent from last week’s mid-market average of 1.1620. In contrast, GBP/USD which was at a 2-year high of 1.4230 last Friday, has fallen a cent.
Over the last few weeks, the market has been relatively flat considering that even though the general consensus, at least in the UK, is that we are easing out of lockdown, certain parameters remain which is keeping sterling rangebound. Yesterday’s market report shed light on the latest Brexit developments and the optimistic outlook for the UK this year so this sterling section will cover other topics. Other aspects dampening the pound recently are unsurprisingly including the Indian COVID-19 variant which has seen many areas within the UK such as Greater Manchester see large spikes in this new strain of coronavirus.
Considering that the reason why GBP/EUR interbank rates have gained 6 cents since the start of the year were partly attributed to the fast UK vaccine rollout, it seems that this factor could be very rate-sensitive should it seem that another virus wave or potential future lockdowns seem more likely. One of the reasons why there has not been a significant selloff for the pound could be that so far recent studies have found that the vaccines administered have been successful in preventing COVID-19 symptoms.
It does little, however, to disperse the uncertainty surrounding if the UK and its associated vaccines will stave off rising virus levels in the long-term. Fortunately, the UK is getting closer to vaccinating half the population with first doses which has now passed over 31.5mn and second doses at 18.7mn for a total milestone achievement of over 50mn in total. As we continue to vaccinate faster than other European countries, the outlook may continue to improve and gain further solidarity behind the pound which has struggling to push past 1.16 which seems to be a newly found key resistance level.
The single currency, just like the UK, will find little support from any economic data releases this week. This isn’t necessarily damaging for the euro though as many data releases recently point out the financial difficulty that economies are facing as the currency market begins to take an increasing interest in recovery speed.
Economist Christoph Weil from Commerzbank stated that the eurozone’s “strong recovery should soon begin” with market predictions for a 4.9% expansion with a 4.6% rise specific to the EU countries. There appears to be a long way to go to reach this level though considering that Europe has slipped back into another recession following the most recent spat of lockdowns. This created a 0.6% contraction in Q4 last year coupled by a 0.7% reduction in Q1 this year.
Despite the future positivity, where GBP/EUR rates are concerned, this isn’t expected to boost the single currency as predictions from the Bank of England have seen UK 2021 GDP predictions at over 7%, higher even than the equivalent US projections. Currently, both regions must first come out of their respective recessions and thus are a long way hitting their targets which is why the market appears in limbo to wait to see how quick the financial recovery may be.
We may have more early warning signals from the EU powerhouse Germany as retail sales figures next week are reportedly going to collapse from 11% to -0.3% according to FX Street. Should levels come in line with predictions, this may create some euro weakness.
Unlike the prior two sections, the US will see a plethora of market data hit the headlines. They vary in importance but the bulk of which are being released on Thursday. GDP Q1 figures are expecting a revision from 6.4% to 6.5%. Whilst this is not a significant change in these specific recordings alone, for the world’s largest economy, any positive changes to the overall economic health of the country will certainly provide a boost to the currency in question.
ADP employment change may balance out Thursday’s market volatility though as the previous 742k new jobs to the US market is predicating to fall to 545k but at least is still showing growth at the least. Finishing Thursday will see a slight drop is US durable goods orders accompanied by a 0.5% rise in non-defence capital goods orders.
Despite the near-term market data, the US is still expecting to do well for the rest of the calendar year considering that vaccine distribution is high and currently the IMF are predicting a 6.4% GDP rebound in 2021. However, rising inflation levels within the US are still a threat to US president Biden who is looking to curb the rising costs of living as wages are simply not rising at the same pace. If unkept, this could lead to rising levels in homelessness moving forwards unless monetary policy stimulus is used to intervene.
This will likely have implications for the most globally traded currency pairing the EUR/USD. To keep in touch with the latest market movement, get in touch with your account manager at Foreign Currency Direct today.
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