Sterling markets responded positively to the fact that Nicola Sturgeon’s Scottish Nationalist Party failed to achieve an overall majority with many unionists voting tactically to keep the SNP out of certain seats. Whilst the SNP continue to push for a second referendum the message from Westminster is clear - To focus on the economic recovery rather than on a distracting and divisive referendum. Downing street is stepping up its plans for the benefits of the union to be seen but also felt in Scotland. It coincides with news that Michael Gove will be working from the Cabinet's office outpost in Glasgow.

The general mood is that both the nationalists and unionists do not think there will be a referendum in the next two years. As Alex Massie writes in the Sunday Times “the referendum battle is postponed, however not a battle cancelled.”

UK Purchasing Managers Index data for the manufacturing sector jumped to a staggering 27-year high last week with an expansion in the sector in output and new orders. The services sector also jumped higher to a reading of 61, the highest in over 7 years, also indicating expansion. The news is great for UK PLC but there are concerns as to whether it will last and how sustainable the bounce is. The Bank of England were also upbeat during last weeks’ meeting revising its GDP growth forecast from 5% to 7.25%.

UK Covid Cases Rise

Headlines Suggest UK COVID Battle Will End by the Summer

On a very positive note, for the UK there have been recent reports suggesting the battle against Covid in the UK will be won by the summer and that booster jabs will not be needed until 2022. The prospect bodes well for a strong economic recovery. Alan Dix who served as head of the vaccine task force said, "My prediction is that sometime in August, we will have no circulating virus in the UK."

UK Gross Domestic Product figures are released on Wednesday and may shed some light on how quickly the economy is already starting to rebound.

Vaccine Optimism and Manufacturing Data Helps Support Euro

The EU too has seen a boost in its manufacturing sector which bodes well for the European economic recovery. EU manufacturing last month as per the Purchasing Managers Index was even stronger than UK manufacturing increasing to 62.9. Broken down, the Netherlands was highest at 67.2 whilst Germany sits at 66.4. Anything above 50 indicates expansion, the numbers are impressive when compared historically.  EU industrial production numbers are released tomorrow and may offer further insight as to the health of the sector.

The EU is also making significant inroads with its vaccine rollout. It has been reported that the EU are averaging approximately 3 million vaccines each day across EU27.

The European Central Bank meet next in June and the markets will be interested to learn of any guidance as to when the central bank will begin to phase out its monetary stimulus. As economies start to open combined with vaccine roll out there is hope that talks can begin as to when monetary policy can be tightened. There are differing views on the inflation outlook which means future EU price data will be of particular importance for the ECB when making these policy decisions. 

US Dollar Falls Against Sterling

The pound rallied almost 1.5% higher against the US dollar yesterday. The movement was more of a sterling story following the local UK elections although the dollar has come under pressure after Friday’s US non-farm payrolls disappointed the markets. US job growth slowed in April with just 266,000 jobs added, a long way short of the near 1 million jobs that had been forecast. Unemployment also nudged higher to 6.1%. 

There is a suggestion that the enhanced job benefits, which pay more than most minimum wage jobs, have been excessive which has stalled the jobs market by limiting the supply of labour. Whilst it is unlikely to persuade the Fed to change course on monetary policy the data will be of concern considering the number in employment is currently several million people less than before the pandemic.

Michael Pearce, senior economist at Capital Economics commented "For the Fed... that means any talk of tapering, let alone rate hikes, is still some way off."

US jobless claims are released on Thursday and may shed some light on what is really happening in the jobs market. Retail sales end the week on Friday and could create some volatility for dollar exchange rates.

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