The pound slipped during yesterday’s trading after the latest ONS report showed the economy missed the Bank of England’s expected inflation figures (by 0.1%). Exchange rates have stabilised since however with continued support being derived from another pickup in vaccinations leaving the UK government very much on track with their plans for all adults to be vaccinated by July.
The UK continues to be on a long, slow road out of this crisis, and it has been telling how consistently linked appetite for sterling has been to the pace of inoculations throughout. For a while this month, it did seem the markets were going through a phase of repricing sterling on the international stage as vaccinations across the UK, Europe and America pickup pace, the economic advantage was arguably fading in the eyes of investors. This was reflected in the slump down to the mid-1.14s against the euro and mid-1.36s against the dollar only a couple of weeks ago.
We have seen a swift recovery since then with the renewed focus on vaccinations which may have once again drawn optimism around the UK economy’s swift recovery as we move closer to summer. The first tangible test comes during today’s trading in the form of the latest PMI release, tracking business confidence across the UK. In terms of output, the most recent surveys pinpointed current levels at 30% below pre-pandemic levels, a clear improvement from the -70% levels reported around the end of last year. Should this growth continue with the opening of businesses in recent weeks there is plenty of reason we could see sterling’s value rise. Those in the market for sterling in the immediate future might want to take note of this morning’s retail sales figures and how they might impact business confidence moving forward. The releases beat market expectations across the board and may set the pound onto a new trend going into the weekend.
In terms of economic activity there isn’t much more on the UK side that might define the pound’s value further before the end of the month apart from next week’s potentially pivotal price movement from the housing sector courtesy of Nationwide. Clearly a big driver for the UK’s accelerated recovery has been the highly active housing market which has been stimulated by various mechanisms provided by the government. It will be interesting to see if/how prices might have moved so far this year and how much this might affect the pounds value on the international stage too.
Importantly, next Tuesday sees the EU parliament vote in slightly marginalised UK-EU trade deal which could prove defining in the implementation of the Northern Ireland protocol which the UK adhered to as part of the withdrawal agreement. It is worth remembering the volatile period sterling found itself in throughout last summer as the UK government faced sustained pressure to Irish border dilemma. It will be interesting to see if a similar market reaction surface once more.
The handing over of power from Chancellor Merkel this September was always marked as a potential stumbling block and a key driver for volatility for the euro in 2021. In the build up to this autumn it is expected that investors might begin to weigh up their European positions which in turn could have wide ramifications for the single currency. Already we have seen the next conservative leader and favourite Armin Laschet’s drop in popularity since his face off with fellow Union leader Soeders.
The German government’s handling of the latest covid breakout has left a bad taste with many voters it seems which has created an opportunity for new parties to make a push, of which the Greens who find themselves with 22% of the voters polled, just behind the conservatives at 27%. It is hard to see how the Conservatives’ position would have been strengthened by this week’s clashes between protestors and police in Berlin as a result of Merkel pushing for more support to enforce fresh restrictions and reduce the threat of a third outbreak of the virus. Clearly these poll results are far from conclusive however they do potentially highlight the degree of uncertainty the markets will be feeling as we move closer to the autumn, which may well weigh on the euro’s value as time goes on and remains something that is worth monitoring for clients holding euros.
In the short term however, euro holders will have welcomed the slight uptick on exchange rates thanks in part to European leaders subscribing to the use of Johnson & Johnson’s vaccine. Yesterday saw GBPEUR drop briefly back below the 1.15 mark and EURUSD hitting the mid 1.20 mark on interbank exchange rates, a level only achieved a handful of times since the start of March. This will have been further compounded by Christine Lagarde’s cautious optimism during yesterday’s European Central Bank interest rate meeting. The President reiterated the ECB’s commitment to an accelerated pandemic purchasing program of which the hope is to drive the bloc out of the ongoing crisis until the outlook is clearer.
Clearly this could provide extra support to consumer and business activity in what otherwise might have been an even more difficult period. This has arguably already been reflected in this morning’s Markit figures and could well filter through to next week’s potentially pivotal inflation figures on Tuesday. The markets now expect notice of the end of this stimulus package to be produced in the fourth quarter of this year.
The dollar managed to force the pound back below the 1.39 mark (interbank) for the second time the month, a level which has proven to be a key resistance point for the GBP/USD pairing through this spring. The move has been arguably motivated by a downturn in global risk appetite rather than optimism state side with the acceleration of new cases in India the latest source of concern.
It was interesting to see that the dollar continued to rise despite signs that vaccinations might be stalling across major states too, in particular within the rural zones where distrust of vaccine is reportedly high. A good example of this is Michigan, where almost a quarter of the available scheduled shots went unused.
Data from the US jobs market also drew investor interest to the dollar. Yet another fall in Jobless claims helped prove last month’s record-breaking lows (since march 2020) are sustainable moving into the summer, something that could provide a level of support to the US dollar’s value in the months to come.
Housing data proved less promising however with yet another contraction in prices reflecting the lack of consumer confidence at present. The Federal reserve have remained cautiously optimistic that this trend will be reversed as the jobs market conditions improve. It will be interesting to see if this proves to be the case. We do have more consumer data out this afternoon. Should yesterday’s indications filter through we might see a reversal on GBP/USD and so might be worth planning around if you are in the market for US dollars.
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