The pound has continued to make steady gains across the board since the start of the year as we managed to avoid crashing out of the European Union without a deal. Since then the pound sterling is trading at close to its highest level since May and the GBPUSD rate has hit its best rate to buy US dollars with pounds since the end of April 2018.
Arguably the speed of the vaccination programme has helped the pound to continue its recent gains with over 22% of the adult population having been vaccinated in the UK. We have seen a huge decline in the spreading of the virus during the lockdown period with the R rate currently bring measured at around 0.7.
This means that we are getting closer to lockdown measures being eased and all eyes will be on Boris Johnson’s press conference due to be held early next week. Rumours are that schools will be reopened in England on 8th March with non-essential retails opening soon as well with the leisure and tourism industry also maybe opening in the next few weeks.
With the success of the vaccination programme and the easing of lockdown this is likely to provide the economy with a huge boost and therefore a reason for sterling’s current strength against a number of different currencies. Indeed, prior to the lockdown back in March 2020 sterling was trading higher than current levels vs the euro and the US dollar so once lockdown measures are eased there is an argument to say we could see further gains for sterling.
However, it is important to realise that the current furlough scheme is set to end in the next couple of months which could result in a huge increase in unemployment levels in the UK, which could cause a negative impact for the value of sterling if the numbers go up quicker than expected.
This morning we see the release of UK Retail Sales data due out for January. Expectations are for a drop of -1.3% compared to last year so anything better than expected could see the pound end the week on a high.
Later this morning the UK will also announce PMI data for both manufacturing and services data so another positive announcement could provide support for sterling exchange rates.
The euro continues to struggle vs the pound with the euro trading at its lowest level to buy pounds with euros since April last year. The continent appears to be struggling to vaccinate its citizens with the same speed as that being applied in the UK which appears to be negatively affecting the value of the single currency.
Although the euro is clearly struggling against the pound the currency is performing relatively well against a number of currencies including the US dollar. Previous ECB President Mario Draghi is now the Prime Minister of Italy with a backing of 262 vs 40 in favour of his new government.
The Italian economy has been struggling, like many, owing to the Covid impact of lockdown so if Draghi can help turn round the economy this may provide the euro with some support. With Draghi ‘s background from the ECB he is a key figure in keeping the Eurozone together so another reason why we could see the euro start to make gains.
The European Union has been rather slow on the uptake of the vaccinations which is part of the reason for its current struggle vs the pound. Some EU officials have spoken negatively about the Astra Zeneca vaccine which has not helped with the speed of the programme.
The ECB minutes which came out yesterday did little to impact EUR exchange rates as there was little commentary to confirm any change in current monetary policy. They confirmed they will continue with their current plans with further easing due to carry on.
The economic data in the Eurozone has not been favourable during the course of this week including Eurozone GDP data which was published on Tuesday. Although this showed a slight rise compared to expectation it was still at -5% so highlights the slowdown on the continent.
Eurozone economic data due out this morning includes PMI data for both services and manufacturing. The data covers the current month so any change in expectation could cause further volatility for euro exchange rates so make sure you pay close attention to this data release.
As we move into next week the Eurozone will release its latest inflation data on Tuesday morning which can often impact the ECB’s decision of what to do in terms of monetary policy.
The US dollar has been weakening against the pound and the euro recently with the US dollar at its lowest level to buy sterling for almost three years. GBPUSD exchange rates are closing in on 1.40. US Jobless Claims hit 861,000 highlighting the problems caused by the Covid pandemic. The expectation was for 773,000 so with such a difference this has caused further dollar weakness.
With GBPUSD exchange rates now above pre-lockdown levels and as we approach 1.40 we are also seeing the US dollar getting closer to pre-Brexit levels back in June 2016. With former US president Donald Trump a distant memory the US dollar has continued to weaken since Biden came in to power.
The inclement weather in the US has also meant that the vaccination programme has been slowed down with many centres not being able to carry out vaccinations in the same numbers before the snow hit. This is another reason why the dollar has been impacted against both the pound and the euro.
As we move into next week we have some very important data due to be released. On Tuesday US Consumer Confidence is due out for February which will be an important indicator to see how consumers feel about the markets.
However, on Thursday we could see a large amount of volatility with a number of key data releases. US GDP, Initial Jobless Claims and Durable Good Orders are all due out. The most important of the three data releases will be GDP and as the world’s leading economy we could see a lot of volatility depending on how the figures come out compared to expectation.
If the data comes out negatively this could provide support for the pound to trade above 1.40 and perhaps break even higher.
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