With the Indian Delta variant accounting for 90% of all new cases, the UK government have pushed back the “Freedom Day” from next Monday to 19th July. Despite the UK economy attempting to claw back from its damaging recession that COVID-19 has created, it did little to weaken the pound which has remained rangebound with GBP/EUR at 1.1650 and the GBP/USD tiptoeing between 1.40 and 1.41.
Alongside this, Brexit disputes regarding the North Ireland Protocol still linger on with many EU officials demanding the UK to stick to its treaty agreement. Irrespective of the outcome, political tension between the UK and EU is never healthy for the currency in question and one could have expected sterling to devalue. So, what is holding the currency up? A flurry of positive events in the recent past and near future are certainly helping. Monday’s unemployment levels declined better than expected to 4.7% and inflation has risen to its pre-pandemic levels of 2.1% for May. The rising price of clothing and fuel created by the raised demand as the economy reopened, will be welcoming news for the Bank of England who had been targeting 2% this year.
This has started to raise questions with economists who are suggesting the need for an interest hike now that the UK economy seems to be on the road to recovery. Conveniently, next Thursday will see the Bank of England’s decision as to whether to hold interest rates at the current 0.1% or move them. Whilst no change is unlikely to see any market movement, an increase in rates should see sterling gain in value. This results from the rising costs of living being indicative of a growing economy and thus the positive sentiment behind the currency in question.
Next Thursday will not just see this event but also the Bank of England (BofE) Asset purchase facility, meeting minutes and monetary policy summary suggesting the outlook for the UK moving forwards. If you are in the market for either buying or selling pounds, this may be a day of high market volatility due to amount and significance of the releases. Should you be looking to buy pounds, you may wish to considering speaking to your account manager here at Foreign Currency Direct ahead of time as the pound may become more expensive to purchase should these data releases come in as positively.
Unlike the UK, the eurozone will not see any currency shifts based off of data releases as nothing till next week will see more events which effect the euro’s value. German and EU Consumer Price Index (CPI) will come Wednesday expecting improved levels from the current 64 and 56 respectively where anything above 50 is considering positive. This will be needed for the euro which has seen the EUR/USD exchange drop away from the 1.22 levels it enjoyed last month compared to the current 1.2110 at time of writing.
The speech from the European Central Bank’s de Guinos did little to buoy the single currency either despite highlighting that the euro area is through the worst part of the pandemic and that the quantitative easing would be relaxed when the member states economies find their feet again. Despite the positive tone, the markets held firm and even saw a 0.2 cent drop in the EUR/USD rate over the course of yesterday’s trading.
This lack of movement may result from the fact that the BofE is predicting a 2021 GDP forecast of 7.25% in comparison with Europe which is expected around 4.6%. However, all nations globally are in similar positions and it may be a case of who rebounds fastest and strongest will see the currency gains first.
The USD, just like the euro and the pound, has not seen much change in currency strength recently either. The rangebound levels make a resistant point which will need some significant stimulus to reshape the currency market.
Despite the lack of movement, there are a few banks and investment companies that have created some bold predictions for 2021. The National Bank of Australia and the National Bank of New Zealand believe that GBP/USD could jump to 1.49 by the end of the year and continue to as high as 1.53 by summer 2022. They are also equally pessimistic about the USD when it comes to the EUR/USD pairing who believe the exchange will rise to 1.29 then to 1.33 over the same time periods. This bearish prediction could be based mainly on the knowledge that safe-haven currencies such as the US dollar are strongest in times of uncertainty as investors buy into them as they typically experience fewer significant downward spirals than commodity currencies such as the pound which saw GBP/USD fall to a multi-year low of 1.14 back in March 2020. However, with many countries globally getting a tighter grip on coronavirus, there is a more optimistic outlook which is causing the US dollar to weaken again.
The US dollar isn’t being supported by recent market data either following Monday’s drop in retail sales from figures already indicating a contraction. Yesterday also saw the Federal Reserve keep interest rates on hold at 0.25% hence the stagnant market we have experienced recently. With inflation rising rapidly in the US at present, there must come a time when the Fed will need to bump up interest rates to check the rising costs of living, so expect some increased pressure and market movement when the next interest rate decision takes place.
Next week will see little other than the all-important GDP figures to be released next Thursday. Whilst this is expected to come in at a healthy 6.4%, any suggestions away from this could create some much-needed volatility.
Should you have a currency exchange coming up involving US dollars, please get in touch with the team here to keep you up-to-date with the latest market information.
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