Despite volatility in the markets last week, the pound to euro exchange rate edged higher on Friday and ended the week back above 1.16 for the second week in a row. Whilst the UK currency had suffered from the US bond market sell-off, it was the single currency that suffered the most given its low yield return and market concern over the Eurozone economic outlook.
In recent years, the pound has become the most risk affected G10 currency, falling in times of uncertainty and gaining in times of global confidence. The pound tends to benefit from more stable bond prices that affect stocks and commodities, which in turn support the pound sterling exchange rate. Whilst the pound has been sensitive to stock market prices and bond prices, the pound may now gain support from UK bond yields, which like those in the US have also increased, making the UK currency a more attractive proposition to investors.
The Chancellor’s budget last week has made the UK the largest spender on Coronavirus based support. Rishi Sunak’s budget was welcomed by investors and has been seen to put the UK in a good position for the months ahead. An expansionary budget in addition to a successful vaccination rollout programme has led economists to predict the UK to be one of the fastest major growing economies this year.
After months of speculation around the possibility of negative or zero interest rates, Andy Haldane, Chief Economist at the Bank of England recently cited the upside risk, which could be due to inflation. This may be something that Bank of England Governor Andrew Bailey touches on when he delivers his speech on the economic outlook for the UK at 10am this morning. Should Bailey mention the risk of “pent up demand,” markets could begin to focus on an interest rate hike for as early as 2022.
Analysts at investment bank Nordea Bank have said the UK will be able to bring forward its reopening plans for the economy as the vaccination program nears a crucial tipping point. The analysts believe that tipping point sits around 35% of the adult population. Currently, the UK has inoculated approximately one in three adults, which equates to approximately 21 million people. The analysts have studied the Israeli data in order to map a program for the rest of the world and believe a major breakthrough can be seen when 35-37% of the population are inoculated.
“With 31% vaccinated and (maybe) 20% with immunity from prior infection, the UK is well on the way to herd immunity. R well below 1,” says Chief Economist Ian Shepherdson at Pantheon Macroeconomics.
In Europe, the EU will urge the US to grant the export of millions of doses of the Oxford AstraZeneca vaccine to Europe. Brussels also wants the US to allow the export of vaccine ingredients for production, according to the Financial Times newspaper. The European Commission told the newspaper, “we trust that we can work together with the US to ensure that vaccines produced or bottled in the US for the fulfilment of vaccine producers’ contractual obligations with the EU will be fully honoured,” which is ironic given the European Commission and Italy have just blocked the shipment of AstraZeneca jab’s to Australia thus preventing AstraZeneca from obligating their contract obligations.
The EU is also preparing to take the UK to court over its unilateral actions in relation to Northern Ireland. In short, the UK basically extended a waiver to allow trade to continue between Northern Ireland and Great Britain, enabling more time to adjust to the new Irish-sea trading regulations. Following a successful Brexit agreement, Lord Frost is now the PM’s Europe Advisor, replacing Michael Gove who was not seen to be tough enough. Lord Frost said that Brussels must stop sulking over the UK’s decision to leave the European Union and work to make Brexit a success.
Despite a promise to act in good faith, the EU has done anything but act in good faith, often behaving more like China or Russia than a western democracy. On that note, incoming US president Joe Biden has remained tight-lipped on Russia’s controversial Nord Stream 2 gas pipeline, backed by France, Germany and Austria, which would supply gas directly to Germany. Biden is also yet to comment on the EU’s growing fondness of China and Germany’s desire to agree a trade deal with the communist state.
The US dollar remained strong at the end of the week following upbeat Non-Farm payroll data and higher government bond yields. The US created 379,000 new jobs for the month of February, more than doubling investors’ predictions, whilst the unemployment rate dropped to 6.2%.
The US. Senate has now passed the $1.9 trillion stimulus package although some amendments were made, notably the number of people who will qualify for a $1400 stimulus payment. All Democrats voted in favour of the bill and all Republicans voted against the bill leaving a 50-49 majority for the Democrats.
The bill, known as the “American Rescue Plan Act” will now move back to the House of Representatives where it will be voted upon on Tuesday. The news has been welcomed by many with US Treasury Secretary Janet Yellen tweeting her support for the bill. The bill will include a raft of new spending, which will say an extension of jobless benefits, another round of payments to households, Financial support for the state and local governments, and further support for the vaccination distribution
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