This morning we have learned of the latest GDP (Gross Domestic Product) data which showed unsurprisingly the UK economy shrank 9.9% in 2020. In providing a snapshot of British economic growth for the end of 2020 the data did however beat expectations. This news indicated 1% growth for October to December, above the 0.5% expected.
Market reaction has been fairly muted, likely because the data is essentially old news and economic data has largely been taken in context with more closely followed news outlining the potential for future growth ahead, such as the vaccine rollout data.
The pound has been staging a recovery in 2021, shaking off some of the worst predictions of a post-EU life for the UK, and earning investor confidence as the UK’s vaccine rollout continues to be successful and outperforming of other nations.
13.5 million people in the UK have now had a jab which has helped the pound to find support as investors find optimism for the UK and the pound ahead. Andy Haldane, chief economist at the Bank of England was mentioned in the Daily Mail yesterday saying the UK economy could come roaring back with economic growth in ‘double digits’ next year.
The pound is currently 1.1377 on GBPEUR interbank rates and 1.3796 against the US dollar. GBPEUR has traded at its highest points in 9-months at 1.1443 last week whilst GBPUSD levels have reached 1.3865 this week, the highest point in 33 months.
The reason for the recent strength are the increased optimism that negative interest rates will not be necessary from the Bank of England, plus expectations that all the ‘pent-up’ demand from Brits trapped at home during lockdown unable to spend so much, will soon be released and there will be a big economic bounce at some point in the future.
Of course, in the currency markets as in life, the story does not always unfurl as clearly and smoothly as we would like. Threats to the optimism underpinning the rebound in sterling include the prospect of further mutant strains which might trigger further lockdowns if the current vaccines are not able to treat them.
The economic damage inflicted by COVID has also led to billions in support from the government which will ultimately have to be repaid. The timing and structuring of the possible withdrawal of support packages may coincide with tax hikes, any of which could cut spending, and threaten the recovery necessary for the public finances to get back in order.
UK debt to GBP ratios have increased from 84% of GDP to 100% in the last two years and UK public finances are often a consideration by investors. Granted, the whole world is suffering from added COVID induced costs, but the UK has the added pressure of operating in a post-EU world with increased focus on how well or badly it performs.
Predictions for the pound against the euro range from as low as 1.06 from HSBC, whilst ING appear one of the more positive out there anticipating 1.16 for the summer. For GBPUSD levels, the lower predictions are NORD/LB, a German bank predicting 1.29 over the next 6-months whilst several commentators see it higher with ING targeting 1.48 and Deutsche Bank 1.45 for the summer.
All in all, the currency markets are impossible to accurately predict so to learn whether this overall performance for sterling is part of a sustained recovery, or more of a short-term spike, please do highlight your position to one of our expert team who will be very happy to discuss the finer points of the market and run through your options and potential events ahead.
The name Mario Draghi may be familiar to anyone with an interest in the euro and European politics in recent years, since he is credited with ‘saving the Euro’.
His pending appointment to Italy as new Prime Minister could be viewed quite positively by markets since his steady hand and vision at the ECB was credited with helping underpin greater economic confidence throughout the Eurozone, epitomised by ensuring Greece were not allowed to default on their debts and setting a mechanism whereby borrowing costs for indebted nations didn’t totally choke off their economies.
There are still many unanswered questions on debt financing within the Eurozone which may lead to weakness ahead, particularly where there does not appear to be sufficient political capital to lead the battles necessary to solve the debt problems.
However, the Eurozone is not alone in suffering financially and having seen debt levels balloon over COVID, with the UK and US both experiencing an increase in debt levels. There is little Eurozone data today so euro rates could take influence from movement on the pound and US dollar, speak to us to learn more.
The pound to dollar rate hit a fresh high this week of 1.3865 underscoring the trend which has been in motion since the US election in November last year where the then Democratic Presidential candidate Joe Biden was expected to win and usher in a wide scale stimulus package which would have the effect of weakening the US dollar. As mentioned above, many analysts do see a move to 1.40 in sight so far.
This is playing out as Congress debates the 1.9 trillion-dollar package and with it too, we have seen the unwinding of safe-haven positions taken up since COVID struck, where investors had bought US dollars to shield themselves from the uncertainty presented to markets by the pandemic.
With sentiment having turned as the vaccine rollout continues to make progress, the US dollar has been weaker and with further success predicted ahead may continue to be a factor influencing sentiment on US dollar exchange rates.
Yesterday’s Jobless Claims numbers indicated a dip in those seeking support, reflecting moderate progress in getting Americans back to work. As the world’s largest economy, investors closely track the performance of the US economy and dollar for signs of how it might influence the global economy.
For more information on the US dollar or any other points raised please do get in touch with our knowledgeable, professional, and experienced team.
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