Despite analysts at some of the major banks predicting sterling strength for the beginning of this year on the back of a Brexit deal being agreed, things haven’t quite worked out that way for the Pound as we kick off the year.

Some forecasts for GBPEUR predicted exchange rates could hit as high as 1.15 on a deal being agreed, but with a fresh UK-wide lockdown being announced this week which comes in to law today, it seems investor’s attentions have shifted to one of concern over the impact the new restrictions will have on the economy.

Since rumours of tougher restrictions were announced at the beginning of the New Year sterling has dropped by 1.7% against the euro. The new lockdown measures mean that, much like back in March last year, schools have closed, most people must work from home if they can and the message is to stay at home to protect the NHS. What is different this time round, however, is that construction sites and factories can stay open and although there is concern over the impact on the economy, many businesses and individuals have now adapted to working under restrictive measures.

Two main components likely make up these gains

UK Announces New Rescue Pacakge for Struggling Businesses

In order to help businesses to survive the latest lockdown, the UK government announced yesterday a £4.6bn rescue package for businesses most affected by the restriction measures. Following the announcement Chancellor Rishi Sunak stated, “This will help businesses to get through the months ahead – and crucially it will help sustain jobs, so workers can be ready to return when they are able to reopen.” The government’s job protection scheme is also still set to run up until the end of April. There are now some questions marks as to whether the Bank of England will also step in with further stimulus measures to help keep the economy afloat in addition to the extra £900bn asset purchase programme rolled out in November.

The next BoE meeting is at the beginning of February and it will be interesting to see if there are any further stimulus measures announced. With interest rates currently at just 0.1% it is unlikely there will be a move to negative rates, but any announcement or rumours of a policy change could impact GBP exchange rates. BoE Governor Andrew Bailey is due to speak today and could give hints into how they could react to the latest lockdown. Any hint of policy change is likely to create GBP volatility.

GBPUSD Drops on New UK Lockdown

A Brexit deal being agreed helped GBPUSD rates hit the highest levels seen in over two and a half years on Monday before fresh UK lockdown measures were announced, but have since dropped by just over 1% as a result of the concerns over the impact of the new lockdown on the UK economy.

The dollar’s gains against the pound have been subdued by continued uncertainty surrounding the US election results. However, this week there are two Senate election reruns taking place in Georgia because each candidate failed to achieve the 50% of the vote needed to take the seat in November. The Republicans currently control the Senate and the outcome will ultimately result in which party wins control of the Senate and therefore have the power to block or assist President-elect Joe Biden’s future policies.

It took more than a week to announce the result of the Georgia election at the end of last year, which the Democrats won for the first time in 30 years, and there is potential that we won’t have the results from this rerun for some time which could ultimately create more volatility and vulnerability for USD. The polls for the reruns closed last night and there are early suggestions that the Democrats will win both seats which would give Joe Biden’s government control of the upper chamber of the Senate once he takes over the White House.

The Federal Reserve Bank’s latest minutes are due on Wednesday evening and earlier this week Federal Reserve Bank President Loretta Mester gave her views on how the economy is coping in the current pandemic and what stimulus measures could look like this year to help support the economy. She stated that the US is likely to struggle short-term as virus cases rise and restriction measures remain in place but is hopeful that a solid vaccination program could help the economy recover quickly.

Despite hoping for a quick recovery, she does still believe that the bank will need to support growth for some time, stating, “Monetary policy will need to remain highly accommodative for quite some time because achieving our monetary policy goals is likely to be a journey and not a sprint.” Tonight’s minutes are likely to give more of an insight into future policy and could therefore have an impact on USD rates short-term. Keep in touch with your account manager here to stay up to speed with all the latest market movements.

Friday could also prove a key date for GBPUSD rates, with a raft of US jobs data to be released in the afternoon including Nonfarm payrolls and the latest unemployment rate. With cases rising across the US and tougher Covid measures being introduced there is a chance the numbers could disappoint and therefore weaken USD value.

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