The pound continues to rally higher this week against both the euro and the US dollar. Rates for GBPUSD reached a 33-month high yesterday on growing optimism that the British economy will rebound sharply when lockdown restrictions are lifted.

Prime Minister Boris Johnson is expected to outline the roadmap out of lockdown Monday 22nd February which could create volatility for the pound following this announcement. The UK has achieved its target of vaccinating 15 million people in the top priority groups. Now focus lies on vaccinating further groups including the over-50’s, by the end of April, which will amount to 32 million people. The Prime Minister has reiterated that he wants this lockdown to be the last.

With schools now to reopen on Monday 8th March there is an understanding within government that a slow easing of social distancing will be the price to pay for this to happen. Ultimately further lifting of restrictions will depend on the progress of the virus and the vaccination programme. As things stand shops, pubs and restaurants are set to re-open any time between early May and August. The Financial Times reports that one senior government official said, "With the new strains, there's a real concern that we can't open up as quickly as we would like."

Economic Factors That Could Impact GBP Rates

UK Gross Domestic Product released last week showed the economy rebounded in the final quarter of 2020 showing growth of 1% and avoiding a double dip recession. The latest lockdown is widely expected to be more muted this time around and to be followed by a rapid recovery.

Samuel Toombs, chief economist at Pantheon Macroeconomics, said "We look for a hefty 6 per cent quarter-on-quarter rebound in GDP in the second quarter, followed by a 2.2% increase in the third." He added that could mean a "faster recovery than in other European countries, where the vaccine roll-out has been much slower."

Focus also looks to the Budget on Wednesday March 3rd. Chancellor Rishi Sunak has already made clear there will need to be "sustainable public finances in the future" hinting towards tax rises.

UK Economic Data this Week

UK inflation released this morning arrived marginally higher than forecast at 0.7%. Expectation is that there may be a sharp rise in the coming months.

UK Retail sales numbers and Purchasing Managers Index data for February are released on Friday which may offer some clues as to the health of the economy during this latest lockdown.

Better Than Expected EU GDP Data Does Little to Support the Euro

EU Gross Domestic Product data released yesterday arrived slightly better than forecast at -0.6% for the final quarter of 2020. However, the fact that lockdowns across Europe in the first quarter of 2021 are widely expected to cause output to fall, it does mean the EU faces a double dip recession. The EU economy shrank 5% in 2020. Compared with the UK, the economy shrank 9.9% last year but the UK avoids a technical recession after the economy grew 1% in the final quarter.

How the euro performs will likely to be determined by the vaccine roll out and how quickly the economy bounces back. The EU is averaging at about 4% of the population having received a first dose.

EU data is light today ahead of purchasing managers index data on Friday for the manufacturing and services sectors.

Will GBPUSD Break Above 1.45?

GBPUSD Reaches 33-Month High

The pound to dollar exchange rate hit a high of 1.3951 yesterday on optimism for a strong UK economic recovery combined with a rise in global investor confidence. However stronger than expected manufacturing data helped boost the dollar in afternoon trade.

In a sign of things to potentially come US manufacturing data from New York yesterday arrived better than forecast. NY factories reported improvements in new orders, shipments and employment levels.

Philadelphia Fed numbers are released on Thursday and may provide further guidance as to how well the US manufacturing sector is performing. The US economy has been hammered by Covid and only this week have the number of new daily Covid cases fallen below 100,000 for the first time in months. How well the economy bounces back will largely depend on the speed and effectiveness of the vaccine roll out. The US is currently averaging 1.3 million vaccinations each day.

The New York stock exchange recorded fresh highs again yesterday. There are fears that a bubble is forming to the extent that the US Federal Reserve is introducing new tests for US banks to withstand the US stock market crashing by 55%. It follows US and global stocks which recorded record highs last week.


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