COVID-19 remains a key driver on the value of currencies globally, especially those who have a successful roll out of vaccinations which has been deemed to potentially give that territory a financial advantage once COVID-19 passes.
Latest numbers per country stand with the UK at the front having administered 22 doses per 100 population, ahead of the US at 15, Germany with 5 and France at 4. The leaders have been Israel reportedly with over 70 and the UAE at 51. Saying that however the UK health secretary Matt Hancock cautioned that it was “too early” to confirm if summer holidays would be possible this year.
The milestone by the UK being hit has been widely supportive of the pound which has this week now reached a fresh 9-month high reached yesterday on GBPEUR and the highest level against the US dollar since May 2018. So how is that possible when it was reported recently that the UK economy contracted by 9.9% last year, which is the biggest contract since 1709?
There could well be several reasons why this may be the case. Growth in the fourth quarter was better than expected with the economy growing 1.0% from the previous quarter despite new restrictions having come in. This being relatively positive for the pound as it means a double dip recession has been avoided.
The way in which the UK economy is made-up has probably added to this bigger number. As a consumption heavy economy, the lockdowns have had a larger impact than some other countries. Consumer spending is also a much larger contributor accounting for 64% of UK GDP, only the US has a higher level with the average across Europe being 53%. Consumer spending is also higher than any other G7 nation sitting at 21%, this includes ‘socially consumed services’ such as meals out, holidays and social events. With three lockdowns this part of the economy has been hit hard.
What is worth highlighting however is due to these larger dependencies on this part of the economy, and even though these drove the economy south in 2020, they could easy account for a reversal in fortunes quickly once lockdowns are lifted. Last week, the Bank of England’s chief economist commented saying that that UK consumers had amassed some £250bn during the pandemic with the middle class and pensions not spending, and the economy could bounce back like a “coiled spring” once restrictions are eased. This being the narrative from PM Boris Johnson recently, 2021 could well see an exceptional rebound for the UK and that optimism has recently gone into the value of sterling remembering that the currency market moves to price in the most likely outcome.
Looking forward eyes are now on next months’ Budget, in particular focus is the potential extension to the furlough scheme which is a big contributor to the ballooning amount of public sector net borrowing in the UK. The Help to Buy Scheme has now been extended by two months due to construction delays caused by COVID-19 and the UK chancellor Rishi Sunak announced that small businesses owners would now have longer to repay borrowing under the bounce back loans scheme. UK economic data this week consists of retail figures as well as Consumer price index on Wednesday morning before trading lines open. As a result, if you would like information about current levels make sure to get in contact today.
The main headline in European politics recently is the news that the former ECB president Mario Draghi was sworn in as Italian prime minister. It may be that his financial knowledge may well make a positive impact on Italy financial wellbeing after the 2008 crash. There is a hope this appointment could restore political stability to Italy.
Economic focus in Europe however continues to show concern. The economic health and the forecasted future health are a key driver for a currencies value when compared to others. Yesterday European data reported a larger slowdown in the industrial sector with a contraction of 1.8% month on month and 0.9% year on year. Generally, across Europe the lack of speed on the roll out of the vaccination program has resulted in people suggesting that lockdowns could well be extended and as a result could well slow down the speed of a recovery taking effect. This week there are a number of economic releases pending from Europe which could well add to this consensus.
Later today, one of the most important data releases from Europe is due with GDP figures for the block. Due to a majority of Europe being in some form of restrictions this data will show the balance between keeping people safe and the economy moving across Europe. Tomorrow we also have Construction data from Europe with many expecting a slow-down in line with most of the world due to supply challenges put down to Covid.
GBPUSD levels have now reached a fresh multi-year high on recent positive news for the UK pound. This has also been added to continual commentary from the US suggesting their printing policy will continue, in turn weaking the US dollars value. This being Joe Biden’s $1.9 trillion stimulus package which took a step forward on Friday, even with the demand on resources within Washington with President Trumps second impeachment.
On Friday, the Federal Reserve Chair Jay Powell stated recently that the real US unemployment rate is “close to 10%” being a fair bit higher than the official rate of 6.3%, this was put down to misclassifying unemployed people as employed. He hinted that policy would remain ‘very accommodative’ until the labour market has recovered suggesting the printing program in the US could continue until inflation is over 2% for some time. Inflation rose recently rising to 1.4% in January from a year earlier. Next on the economic calendar for the US is Wednesday with US retail figures as well as Industrial productivity.
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