The pound has made significant gains against the majority of major currencies since the beginning of the year and there have been two main catalysts.
The first of which is the Brexit deal. Although taking us right up to another extended deadline Boris did manage to get a deal over the line, and although it was no great shakes it did ease investor concerns. With a no deal scenario now off the table the anchor was pulled and GBP started to make gains. Although there was not the instant spike in value as many economists predicted gradual gains were witnessed well into April.
The second major catalyst is the rate of vaccination in the UK. The government has hit its target of offering 32 million people a first dose by the middle of April. That equates to 48.6% of the population. The next milestone is to have all UK adults offered a first does by 31st July. The government is on course to hit this target and this does bode well for the pound as the UK economy will be in a better position to recover from the damage caused by the pandemic.
Against the euro we have witnessed some of the best levels in exchange since February 2020 and against the US dollar we have seen a near 3 year high.
Tomorrow we will witness the release of UK claimant count (those who are unemployed claiming benefits) and also the unemployment rate. Unemployment is a key barometer as to the health of an economy and as such can cause volatility on the market. There is set to be an increase from 5% to 5.2%, if data lands away from expectations, we could see a change in sterling value.
It seems we may have been overly pessimistic in regards to the Eurozone’s vaccination roll out and the euro has now started to claw back some of the ground it has lost against the US dollar and the pound.
There has now been 100 million vaccinations in Europe, equating to 20% of the population. Pfizer has also pledged a further 250 million does to Europe in the second quarter which has increased optimism surrounding the euro and will no doubt substantially reduce the time it will take for the bloc to recover from the economic damage caused by the pandemic.
GBP/EUR did reach as high as 1.18 on bank holiday Monday, but we have seen GBP/EUR start to stabalise around the 1.15 mark. There are some who believe the GBP Sterling could be set to bounce back.
Recent strategy research briefings from BMO Capital Markets suggest the pound-to-euro exchange rate's decline could be reversed due to existing positive fundamental and technical drivers.
Head of European FX Strategy at BMO Capital, Steven Gallo has assessed the latest lending data from the Bank of England (BOE) and believes the flow of money into the UK economy could boost the country's economic recovery. The Credit conditions survey for Q1 showed that commercial banks were planning a substantial increase in credit availability in the Q2.
Gallo stated "The UK's banking system is likely to add a tailwind to the economic recovery over the balance of 2021,"
There was also vaccine supply issues in the UK which now seems to be no longer an issue and tensions in Northern Ireland could end with the UK and Europe close to revising their agreement.
Tomorrow see the release of the European Central Bank (ECB) lending survey. It’s objective is to enhance the knowledge of financing conditions in the Eurozone. It provides valuable info to the ECB Governing Council’s assessment of monetary and economic developments and this can influence monetary policy decisions and in turn effect the value of the euro.
Many market analysts predicted at the start of the year US dollar was set to fall in value. A strong global recovery and over spending from Washington mean that investors were predicted to lose faith in the dollar and seek investment elsewhere.
Contrary to this, the USD Index which measures the currency’s value in comparison to a basket of six other major currencies has showed gains of 2.3% in 2021. US dollar has had the best quarter since 2018 according to the index, although sterling is the anomaly.
10 year bond yields could be a factor in dollar strength, the yield has now risen from 0.9% to 1.65% which does mean the US dollar is somewhat more attractive.
There are concerns over inflation however and Biden’s current reign has so far seen him focused on tax hikes and splashing the cash and there could be further regulation on the agenda. It could be the case that this could lead to US dollar weakness later in the year.
There is little data of consequence coming from the US this week until we get to Friday when we will see Manufacturing Purchase Managers Index (PMI) and Services PMI. These will give an insight into business conditions in each sector and as such could cause a change in dollar value. Manufacturing PMI is set to fall from 66.6 to 60.8 and Services PMI is set to fall from 51.5 to 46.2.
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