There has been surprisingly little market movement for sterling exchange rates throughout May, with few days of movement over 0.5 cents for the GBPEUR pair which is unusual.
The pound has managed to climb quite dramatically since the turn of the year and most importantly for sterling sellers, it has consolidated towards the top end of its recent ranges. Cable (GBP to USD) is currently trading around some of the best levels available in over three years, as GBPUSD last traded above its current levels in early April 2018 even if only just. Cable has risen by around 3.5% since the turn of the year and by 11% over the past 52-weeks.
The boost to sterling’s value over the past year or so has been mostly attributed to the avoidance of a no-deal Brexit vote, although there remain some issues to clear up. The impressive roll-out of the UK’s vaccination process has also helped give the pound a boost especially after other regions have struggled, and the UK economy has opened sooner than many others further strengthening the pounds value.
Although politics have begun to have less of an impact on the pound’s value now that Brexit talks are no longer dominating the financial headlines, tensions between British PM Boris Johnson and his former advisor Dominic Cummings have hit headlines this week. The accusations from Cummings could impact sterling in a negative way should they continue, especially if Johnson’s position and cabinet come under further strain.
Cummings has accused the government of inaction which has led to unnecessary deaths, and he has even accused Johnson of playing down the seriousness of Covid-19 in early 2020 to the extent that he was prepared to have the virus injected into him on live television to show that it was benign.
Whilst this kind of back and forth between politicians isn’t unusual, it’s dominating political news sources and could impact sterling exchange rates should it cause any political instability in my opinion.
Economic updates out of the UK are light for the remainder of the week, with perhaps the highlight being a speech from Bank of England member Dr Gertjan Vlieghe which takes place later today at 11am.
Despite the longer-term trend for the euro to pound exchange rate being negative, with the pair losing over 4.5% over the past 6-months alone, the euro has begun to stage a small fightback recently.
This week EURGBP hit a two-week high, providing euro sellers with a small window of opportunity should they need to convert funds during this period of unusually low volatility.
The political disruption involving the accusations from Prime Minister Boris Johnson’s former advisor (Dominic Cummings) will have perhaps dented the pounds value. To add to this, there appears to be renewed issues surrounding Brexit in Northern Ireland. The UK’s PM, Boris Johnson would like to remove border checks on the Irish Sea for goods passing between Britain’s mainland and Northern Ireland, but the EU doesn’t wish to make any amendments from the deal agreed in December and this has caused some tension within Northern Ireland especially. A revival of political tensions and violence within Northern Ireland would of course be considered negative for the UK, and therefore this subject could help EUR/GBP climb due to GBP weakness.
Furthermore, regional outbreaks of the Indian variant of Coronavirus within the UK are also concerning the markets, and Europe catching up with the likes of the UK and the US in terms of vaccinations is likely to improve sentiment for the single currency moving forward.
Business confidence within the EU is also improving, which could be another reason for the slight improvement to the EUR to GBP rate. Yesterday it was reported that French business confidence in May has risen sharply since the last report in April and hit a two and a half year high. Earlier in the week we also found out that German business confidence has hit a two-year high, so sentiment is certainly improving within the powerhouses of the Eurozone.
Yesterday France became the latest European county to impose restrictions on UK tourists due to the spread of the Indian coronavirus variant. From May the 31st, people arriving from the UK must quarantine for 7 days upon arrival to France.
There will be quite a busy end to the week for Eurozone releases as European Central Bank members speak this morning and this afternoon, and then Consumer Confidence figures will be released tomorrow for the EU as a whole.
The pound to US dollar exchange rate spent most of the day yesterday trading within a cent from the highest level its seen within the past year. 1.4243 is the current annual high, but with the pound consolidating just below this level for around two-weeks now, the ascendancy appears to be with the Pound despite the low levels of volatility currently.
Many foreign exchange analysts have earmarked 1.45 as a key level, as cable hasn’t traded above this key level in almost exactly 5 years. It was the vote in favour of Brexit that pushed GBPUSD below this level, and since then we’ve seen the early 1.40’s tested but each time the pound has failed to break above 1.45 against the US dollar. Cable has broken above 1.40 but failed to trade above 1.45 three times since June in 2016.
US inflation levels have hit the headlines in recent weeks, as the inflation level stateside has climbed to the highest level since 2008. This is sparking global inflation fears as the cost of living since the Democrats took office in January has soared especially when gasoline and building material costs are considered. Bond yields have climbed as a result, and there have been rumours that the FED will need to intervene and hike interest rates at a time when the global economy is in a precarious position after a year of lockdowns owing to the coronavirus.
In regard to interest rates, earlier this week the BoE’s Silvana Tenreyro said she expects no dramatic interest rate hikes, and that she expects global financial conditions to continue to support growth. She touched on the US specifically and mentioned that the US Federal Reserve would not need to raise interest rates sharply. She made these comments in response to a question about whether growth within Latin America could be derailed by tighter US monetary policy, so the increasing rates of inflation in the US should be followed in my opinion as it’s already being discussed by other central banks.
Durable goods orders and GDP figures will be released out of the US later today, so feel free to get in touch if you wish to plan around these releases which are scheduled for a 1.30pm release.
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