Pound sterling exchange rates are currently getting close to 2 month lows vs both the euro and the US dollar as the positive news about the speed of the vaccination programme in the UK appears to be having less of an impact on sterling value.
This week we saw the release of UK export data to the European Union which saw an improvement compared to that experienced in January. As the UK is now officially out of the EU and was in lockdown, it should come as no surprise that the previous export data was low at the start of the year. However, what is worth noting is that although there was an improvement it was much lower than last year and imports from the European Union to the UK were also lower than expected. Prior to Brexit there was also an increase in stockpiling to avoid any post-Brexit trauma caused by the lack of clarity when importing and exporting.
According to the Office for National Statistics UK GDP has grown by 0.4% in February which although is positive in one way it is still 7.8% compared to a year ago highlighting the issues caused by the pandemic and subsequent lockdowns. We are currently experiencing the biggest recession in over 300 years which means that the government are having to borrow huge amounts to fill the gaps.
On Tuesday, the UK will release its latest set of Unemployment data. The data is set to hit 5.2% so anything different is likely to have an impact of the value of sterling exchange rates.
The ONS has also confirmed that up to 5.7mn workers were on furlough during last month and with the furlough scheme set to end by September we could be in for a difficult period towards the end of this year.
The euro has started to fight back against the pound and has seen the benefit of the uptake and speed of the vaccination programme on the continent. When the vaccine process began there was a real problem with the uptake as well as the slow start. The beginning of the process was very slow compared to that administered in both the UK and US.
However, during the course of April and as of Wednesday, the European Union has managed to vaccinate a total of 100mn people, which works out at approximately 20% of the population. Head of the European Commission Ursula von der Leyen has also said that Pfizer will increase the total supply to 250mn during the second quarter of this year.
The positive news surrounding the vaccine news has helped the euro gain during the last few weeks as it puts the continent closer to removing its current lockdown status in various countries.
Later this morning at 9am the Eurozone will publish its latest Inflation figures for March with the latest release of its Consumer Price Index. Figures will include month on month data as well as year on year data. The reason why this set of data is important is that it will have an impact on the European Central Bank’s decision concerning monetary policy. Typically if inflation rises then the decision is often taken to increase interest rates which can help the currency involved. However, if it remains low then it shows a sign of struggle within the economy as well as pressure to consider cutting rates or increasing Quantitative Easing. Both of which can reduce the value of the euro. Year on year figures are set for 1.3% so anything could cause movement for euro exchange rates.
The US dollar has been fighting back against sterling and the euro recently after having hit a near three year low vs the pound earlier this year.
The dollar has been buoyed by the success of the vaccination programme which has helped the world’s leading economy to avoid prolonged lockdowns as seen in the UK and on the continent.
New President Joe Biden has had time to settle in which has helped to stabilise the US economy. In March US Retail Sales showed a strong recovery coming out at 9.8% vs the expectation of 6.3%. Initial Jobless Claims also fell showing that the economy is making a good recovery.
This good news has helped the USDGBP exchange rate to hit its best level since February and if economic data continues to demonstrate a recovery in the US then this could create further US dollar strength vs the pound creating some good opportunities to sell dollars to buy pounds.
Turning the focus towards US monetary policy and the Federal Reserve have suggested that interest rates will remain on hold for a long time and perhaps not be changed until at the earliest 2023. However, one potential problem for the Federal Reserve could be ‘Taper Tantrum’.
According to the Global Fund Manager Survey by Bank of America the biggest risk to the US economy is not Coronavirus but the risk of Taper Tantrum combined with rising inflation.
Back in 2013, a few years after the initial global credit crisis, the US reduced its tapering which means pumping less into the economy and as and when this happens this could have huge repercussions in the longer term for the US dollar. This also ended up causing a number of global economies to hike interest rates so although this is unlikely to happen anytime soon when and if it does happen we could see interest rates start to rise in unison with the US.
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