As sterling continues to fluctuate around the best levels to purchase euros since the end of spring of last year whilst also maintaining the multi-year highs against the US dollar.
This strength has been well documented and strongly linked to the optimism generated by the government’s ability to roll out its vaccination schedule at an impressive rate when compared with its European counterparts for example.
For this strength to continue though the markets might be holding out for Brexit pressures to continue to ease as the year goes on and for now at least, UK businesses clearly are not out of the woods. The Northern Irish border has dominated the political headlines of course and have culminated in a meeting between NI leaders, cabinet office minister Gove, and European Commission Vice-President Maros Šefčovič as they look to resolve the issue.
Indeed, as per the UK’s departure from the EU, Northern Ireland was able to retain a partial position within the single market so as to avoid being forced to set a hard border in the Irish sea. Supply chains have been continually disrupted since the start of the new year however with certain goods being forced through mandatory customs checks. The delays on both sides of the border have been consequential, forcing MP’s from Northern Ireland to call for added support from PM Boris Johnson, who’s Brexit deal has left their constituents feeling like foreigners in their own country.
The fact talks yesterday were described as constructive from all parties suggests a resolution is in the making, with some political correspondence expecting the UK and the EU to invoke article 16 of the exit agreement, essentially allowing for more flexibility on customs checks in situations where standard practice could lead to social or economic struggle. This could prove to be yet another decisive step for sterling’s value and so progress on a new deal here is worth monitoring if you are in the process of buying foreign currency.
The shrinking probability of negative interest rates in the UK should not be overlooked as another contributing factor however and this afternoon’s monetary policy meeting from the Bank of England holds the potential to set the pound onto new levels moving forward too.
There were plenty of concerns within the market, particularly during the latter stages of 2020 that negative interest rates would be seen in the UK sooner rather than later. Indeed, throughout last year, the BoE understandably cautious tones did very little to relax investors, particularly as business confidence and consumer spending plummeted upon every phase of regional restrictions and national lockdowns. Since however the BoE have gradually changed their tune in line with expectations that the vaccination roll out will help prompt the economy back on it’s feet. As a result, no change to interest rates is expected this afternoon. However, this morning’s consumer spending figures might have thrown a curveball into the mix. New car sales dropped by an eye watering 40% last month as a result of the current national lockdown, highlighting the clear lack of consumer spending. It will be interesting to see if this changes the BoE’s tone this afternoon.
It is fair to say the single currency may have started 2021 on the back foot with a fall from grace against the majority of its currency counterparts all stemming from inconsistencies in management of the spread of the virus from one member bloc to another.
Business confidence contracted towards the end of last year as the prospect of further restrictions sapped consumer activity and in turn weakened the jobs market. Compounding this was the latest IHS Markit PMI reading for January which showed another contraction at 47.8%.
With further conversations ongoing in France, Germany and Italy over added restrictions in the month ahead, might we begin to see the markets make another move against the single currency in the near future?
On the flipside, there have been plenty of shows of unity within the Eurozone, something that will be desperately needed for the bloc to break out of this crisis successfully.
The German military for example provided 26 doctors along with 50 ventilators and 150 beds to Lisbon at a moment’s notice, leading the way with other European nations to help Portugal through the ongoing health crisis. Indeed, the situation in Portugal has escalated since the start of the year, with half the country’s COVID-19 related deaths being reported in the past month.
The US dollar might have found some much needed support from the jobs market with private payrolls jumping by over 174,000 jobs last month after heavy losses seen towards the end of last year in the aftermath of election chaos. This jump seems to have mostly been prompted by an easing of restrictions across major states despite another acceleration in cases. Furthermore, the recently pledged $900 billion relief package might have fuelled added business confidence and so a new positive trend could start to form for the dollar as we move into spring. This could be spurred on by the impressive $1.9bn budget president Biden is looking to push through in the coming days.
Updates from the US jobs market have historically impacted the dollar’s value on the international stage, with the economy only managing to restore 12.5 million of the 22.2 million jobs lost since the start of the pandemic. A recent report from the Federal Reserve further highlighted the challenges that lay ahead, with 78% of businesses attributing a loss of revenue last year with over 45% being forced to make cuts to their wage bill.
As a result, tomorrow’s potentially pivotal non-farm payroll release could draw added weight with the markets. Should last month’s positivity filter through in this release might we see GBPUSD rates fall away from the record highs we are currently seeing?
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