Yesterday, the Bank of England predicted in their latest growth forecasts that the UK would enjoy its best year of economic growth this year of at 7.25%, a record since 1941 and the Second World War.
There is a prediction that households have squirreled away around £200bn worth of savings because of lockdowns, and that 10% of this could be spent.
The pound was actually relatively unmoved on this news, giving support to the arguments that much of the good news ahead may now be ‘priced into’ the value. Whilst this appears to be the case at present since the pound has been fairly flat, continued strong economic performance and a successful easing of restrictions could see the pound rising ahead.
Also tempering the potential strength of the pound, the Bank of England stated there were unlikely to be any interest rates hikes for 18 months, from the current record 0.1% low. Typically, a rapidly expanding economy might require interest rate rises to temper inflation, which could lead to a stronger pound.
Yesterday, 48 million Britons were able to vote in the most important elections since the General election in 2019. Results are delayed because of COVID but as they trickle out throughout the day could influence sentiment.
The most important news for the pound could be the results from the Scottish parliamentary elections, with the final results expected to become clear over the weekend. A majority for the SNP (Scottish National Party) and other pro-independence supporting parties could open the door to a second Scottish Independence Referendum, an event with real potential to undermine confidence in sterling.
With the market not even benefitting from exit polls to gauge sentiment or predict the outcome, the news will only really be able to be digested properly by the currency markets next week as the news has become clearer. Sterling might benefit too from a relief rally should pro-independence parties not gain a majority, with the thorny issue being put to bed for the time being.
Whilst any Independence vote would be many years away, the addition of this event to the outlook for the pound and the UK ahead could prove destablising. Morgan Stanley has recently put the overall chance of Scottish Independence at 15% whilst Citi see it at 35%.
Sterling was deeply troubled by the previous referendum in 2014 so the potential here cannot be overstated and depending on the results over the weekend any clients wishing to manage their currency exposure might benefit from a chat with our expert team regarding the use of Limit and Stop/Loss orders to manage the risk and volatility.
The euro has been stronger against both the pound and US dollar of late following continued progress with their COVID vaccination programs and the easing of restriction, which has provided more economic confidence.
30% of German and 27% of Portuguese citizens have now received at least one dose of the vaccine, whilst the number is 25% for Spain and France. Getting the vaccines distributed and used is seen as key to economic prosperity ahead and this has allowed the Eurozone and the single currency to register gains.
At the more recent stronger points for the euro against sterling, seen on April 26th at 1.1468 (0.8720 on EURGBP), this represented a 2 ½ month high for the euro against the pound. Considering we are at the time of writing 1.1528 (0.8675 on EURGBP), we are only just over half a cent off this more recent high for the euro. Against the US dollar it is a similar picture with the more recent high of 1.2135 on the 29th April, the highest in 2 months, we are currently 1.2054 so within a cent and well above the 1.1720 lows in the same period.
Despite catching up with their Western peers the Eurozone might still face some challenges ahead as the OECD (Organisation for Economic Cooperation and Development) has predicted lower growth for the rest of this year as countries more reliant on tourism struggle to bounce back. The Eurozone is predicted to grow 4% this year by the European Central Bank, which is still impressive but might be slightly behind the Bank of England’s forecast for the UK on 7.25%, and the US Federal Reserve are predicting 6.5% for American economy this year.
In terms of economic news ahead to move the euro today we have the latest German Industrial Manufacturing data but GBPEUR rates might be more influenced from the latest news from not only the UK elections results, but also the American Non-Farm Payroll and Unemployment data this afternoon at 13.30, which might shape EURUSD rates this afternoon and influence the wider currency market because of its importance.
The American economy continues to roar ahead following a very successful vaccination program which has now seen 44% of the US population receive a vaccine.
Last week, it was confirmed the US economy grew 1.4% in Q1 of this year, a testament to the success of getting their economy back on track. This contrasts with the Eurozone whose economy contracted in the same period by 0.6%, with the similar figures for the UK due later this month but not expected to be this strong.
The US dollar had been bouncing back nudging GBPUSD levels back below the 1.40 mark and EURUSD below 1.20 as investors became more confident the rising economic growth would force the US central bank (Fed), to raise interest rates sooner than expected.
This topic continues to be one of the main talking points for the US dollar, with the current mixed picture possibly preventing any major new direction being established, and the dollar having been fairly range bound in the last few weeks. That could all change today with the latest US Non-Farm Payroll and Unemployment data due at 13.30 today, as investors get the latest news on the labour market for the American economy. This release is notoriously volatile and can influence all manner of different currency pairings seemingly unconnected to the US dollar like the Australian and New Zealand dollar, as well as the more obvious like the US dollar itself and also sterling and the euro. Predictions are for 978k new jobs to have been created, a welcome sign of future growth and Americans getting back to work, shrugging off some of the COVID induced troubles hampering their country and the world in 2020.
For now, the market seems to believe the Fed once again that no interest rates are likely be forthcoming for many years, but even ex-Federal Reserve chairlady Janet Yellen had been drawn into the conversation, having to back pedal on some remarks that might have indicated she was in favour of hikes sooner.
Today has lots of potential for volatility with what is often terms the most important release of the month for the US dollar, so if you have any pending currency transfer ahead today could be a good time to review your position with our time.
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