The lower prospect of negative interest rates from the Bank of England and underlying positivity offered by progress on the UK’s vaccination program is providing a path to better times ahead for the UK economy and the pound.
Despite reports of vaccine shortages ahead in the Times today, the UK has now vaccinated 4 million and has been leading the charge globally to get the nation immunised.
The pound against the euro is trading this morning at 1.1240, very close to the highs of 1.1270 seen in November. For GBPUSD, the interbank rate is 1.3662, which is very close to the highs over 1.37 of last week which was a level not seen since May 2018, a 32-month high for the pound against the US dollar.
Inflation data released this morning confirmed prices rose by 0.6% in December for the UK, ahead of the 0.5% expected and further weakening the case ahead for negative interest rates.
Whilst Brexit is likely to continue to be a hot topic as we try to fully understand the benefits and drawbacks of a post-EU world, the removal of no-deal as a prospect has arguably given the pound a firmer footing ahead.
Sterling is at risk from more difficult trading terms with the EU, but it might be many months before this can be fairly and truly assessed, and with the economy in dire straits because of COVID anyway it will be difficult to separate and truly understand the influence of both factors immediately.
Bank of England Governor Bailey will be speaking this evening at 5pm which may well be of interest for sterling. Following his comments last week that indicated negative rates were not a forgone conclusion and would involve ‘a lot of issues’ sterling has performed better.
Andy Haldane, the Bank of England’s chief economist yesterday commented he expected the UK economy to recover ‘at a rate of knots’, another indicator of potentially more positive times ahead and a sign that cutting below the record low of 0.1% has become less likely.
Sterling has been on a gentle incline against many currencies so keep up with your account manager to better understand if this is temporary or the beginning of a more pronounced move.
There is big news in the Eurozone tomorrow with the latest European Central Bank Interest Rate decision and Press Conference. Christine Lagarde, the President of the ECB will deliver an assessment of the Eurozone economy going into 2021 and ahead. Whilst there is slim chance of any policy changes, it may as it often is, be the tone and sentiment of communication which is scrutinised and may trigger volatility for the euro.
The Eurozone is tackling both the health and economic crisis of COVID-19 with lockdowns, weaker economies and vaccine programs running less well than some of their Western peers.
Politics is also a topic of consideration with the Italian Prime Minister Giuseppe Conte narrowly escaping a confidence vote in the Italian Senate yesterday. The lack of confidence stems from his handling of the pandemic with the fragility at the top of Italian government only providing more concern for their troubled economic state.
Italian debt to GDP (Gross Domestic Product) is 135%, second only to Greece in the Eurozone and with their economy having contracted 11% in 2020 there are concerns about how they will get back on track.
For more information on the euro and what lies ahead for the single currency in 2021, feel free to contact your account manager.
The headline news today appears to be the inauguration of Joe Biden in America around 5pm UK time. Joe will become the 46th American President today as he takes the mantle from Donald Trump, a man never too far controversy.
The storming of Capitol Hill two weeks ago has the army on guard for any protests and whilst this wasn’t too influential on markets, is definitely a point to consider.
What might be more interesting for financial markets from the Biden Presidency is the wide-ranging stimulus package to be administered by Biden’s Democratic Party that has seen the US dollar weaken.
The US dollar accounts for 60% of globally traded FX volumes which means we could see volatility as markets digest this passing of the Presidential baton. The US dollar has been weaker on this news and also safe haven positions previously taken up in 2020 during the height of uncertainty over COVID-19, give way in the face of more optimism ahead for the global economy in 2021.
Any bigger movements on the US dollar can have wider influence on other currency pairings, as the dollar is the most heavily traded currency against most currencies. So, if the US dollar weakens against the euro on EURUSD, this can mean the euro is stronger against other currencies like the pound.
Next week is the US Federal Reserve Interest Rate decision where we will learn more about how the ‘Fed’ are viewing policy ahead. With all this stimulus and predicted economic growth ahead, they may be some need to wind in their expansive QE (Quantitative Easing) program and consider hiking interest rates sooner to combat inflation rises ahead.
QE is the purchase of government bonds by the central bank and can also weaken the currency concerned by increasing the money supply globally. Any hints the Fed will need to ‘taper’ their QE plans or consider raising interest rates may in theory see the dollar reversing some of its recent losses and start to climb so the path ahead for the US dollar is far from clear.
For more information on this historic day ahead and the potential influence on the US dollar and other currencies please do speak to your account manager.
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