2021 has seen a volatile start of the year for the pound. On the one hand, the rollout of vaccines across the UK is providing a positive narrative for the pound, on the other hand we have seen global markets fall and provide a negative tone. The pound to euro market rate has risen to an eight-month high at 1.1347 this week breaking through the resistance level around 1.1280. The next resistance level is around the 1.15 mark, is the pound destined for these levels in the coming weeks?
Jeremy Boulton, a Reuters market analyst believes so… “there have been some big changes since Brexit, an event long feared, and that alone is cause to eye a break higher.”
The pound has seen renewed buying interest with many analysts citing the UK’s vaccine rollout as being the primary driver. JP Morgan have noted they remain positive on the pounds near term movement. However, with the UK set to endure lockdown for a significant amount of time this could offset any potential gains.
Jane Foley a senior FX Strategist at Rabobank has said “Optimists are hoping that the UK’s relatively rapid vaccine roll-out will weigh against the prospects of a negative bank rate and support the country’s economic rebound”. The UK has now delivered first doses to approx. 10% of the population which is around 7 million people. The speed of the rollout in comparison to other countries is being seen by exchange analysts as important for economic growth in 2021.
In contrast, the EU has so far vaccinated two in every one hundred people compared with ten in every one hundred people in the UK. The CEO of vaccine manufacturer AstraZeneca said the UK was likely to have vaccinated half the population by March which is just over thirty million people.
Concerns over the third national lockdown in the UK could lead to a sharp contraction in economic growth, which could in turn prompt the Bank of England to cut interest rates in 2021. If the interest rates are cut, you can expect the currency in question to weaken.
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The markets generally expect the European Central Bank (ECB) to remain steady in terms of monetary policy. However, there has been fresh speculation that we could see interest rate cuts soon. Governing Council Member Klaas Knot said “I always quip that we’ve explored the effective lower bound, but we haven’t found it yet. There is still room to cut rates”.
Fresh speculation around interest rate cuts alongside vaccine fears has weighed on the euro in recent days.
The euro has been on the back foot against most major currencies recently in the wake of Germany’s consumer confidence data release. According to market research institute GfK, German consumer morale has tumbled from 7.5 to -15.6, this is well below estimates and is the worst reading since June 2020. This sharp drop in confidence is due mainly to coronavirus concerns and an extended lockdown which puts pressure on unemployment.
We have German economic growth figures today which are expected to show no real change from the fourth quarter of 2020. Of course, if we see unexpected figures, then this can affect the euros value as Germany is the Eurozone’s largest economy.
Recent reports show the US economy grew 4% in the final quarter of 2020. Also, US initial jobless claims data indicated 847,000 people filed for unemployment support which is less than the market expected.
Despite these generally positive economic figures, the pound has continued to remain strong against the USD suggesting investor sentiment has shifted now that Brexit has faded in importance.
There was a downbeat tone from the US Fed Reserve in the first policy-setting meeting of the Biden era. The bank signalled concern about the pace of economic recovery but has kept their cards close to the chest for the moment.
Biden continues to deliberate his fiscal stimulus plans with lawmakers, which may hit the news in the coming weeks. The US Senate and House of Representatives will begin delivering Biden’s plan for Covid-19 relief to businesses suffering from the pandemic. We will hear more about their plan early next week.
Schumer has said “we need recovery and rescue quickly. Everywhere you look alarm bells are ringing”.
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