This week a consumer confidence survey from YouGov indicated that Britons are at their most confident since the pandemic began.
In a signal of what this might mean in practice ahead, the OECD (Organisation for Economic Co-operation and Development) yesterday increased forecasts for UK growth this year by 0.9% to 5.1%, and next year by 0.6% to 4.7%, predicting the UK will be back to pre-pandemic growth levels by the end of 2022.
Sterling was yesterday testing the 1.17 region with an interbank high of 1.1695. There has been a notable decline against the US dollar with rates dropping back below 1.40 trading at 1.3870 this morning, a reflection of some of the shifts in the currency market for the US dollar, which has strengthened following some bigger moves on EURUSD exchange rates. Against the euro, we are now nearly 7 cents higher than the 2021 lows of 1.10.
There is little data of significance for the pound today but Friday is the latest GDP (Gross Domestic Product) data as well as Industrial and Manufacturing data. The growth data looking at January is predicted to show a fall of 4.9% in output from that month that might influence sterling.
Economic news has not carried quite as much significance for the currency markets as generally it has all been dire during COVID, but next week is the latest Bank of England interest rate decision on Thursdays 18th March and could be very interesting.
The Bank of England is still open to the idea of negative interest rates should the economy falter and despite the UK Government’s roadmap out of lockdown currently appearing realistic and helping fuel recent positivity, a fresh hike in case numbers or another mutant strain emerging could easily change the plans.
Bank of England Governor Bailey has pointed out potential challenges still ahead whilst also acknowledging ‘light at the end of the tunnel’.
In terms of rate predictions by major financial institutions on GBPEUR for the next 6 months, there are predictions still of a move higher with ING predicting 1.1765, the highest we found over that period.
In our research of predictions (covering 40 different institutions) the lows are 1.0526 by DZ Bank, with Commerzbank also lower predicting 1.1364. Of course, predictions are not guarantees of outcomes but it does provide some insight into what might lie ahead, and for many of the major banks putting out forecasts it does appear GBPEUR levels are near the higher points already.
If you have a currency exchange ahead and wish to better understand the market and the latest news and forecasts, please speak to our team to discuss.
The euro could well be in focus for the rest of the week as we have the European Central Bank (ECB) Interest Rate Decision due tomorrow at 12.45 UK time, with their press conference shortly after at 13.30.
The euro has had a mixed performance in 2021 but with the currency market reacting to individual economic area’s vaccine progress, there has been many questions over the arguably lagging EU and Eurozone response.
The euro has weakened to its lowest point in one year against the pound with €1 equaling £0.85 pence at the weaker points ending February and yesterday. The focus has been rising borrowing costs where rising bond yields have the potential to make future borrowing more expensive for indebted Eurozone nations.
The tone of Christine Lagarde’s Press Conference tomorrow will be closely monitored since whilst no actual change is expected, there is scope for future further easing with an extension of the ‘PEPP’ Pandemic Emergency Purchase Program, where the ECB has so far committed €1.85 trillion of public and private sector investment to help steady the Eurozone economy through COVID-19.
With uncertainty as to the state of the Eurozone’s recovery ahead, any potential expansion or changes to this policy might influence the value of the euro. Interestingly, in the OECD report mentioned in our sterling section, the expectation for Eurozone growth to increase has only shifted up 0.5%, which is much less than its predictions for the US and the UK. The OECD report pointed out that countries reliant on tourism will find it most difficult to bounce back, this will be another factor Christine Lagarde might need to consider ahead to help ensure the Eurozone can bounce back as soon as possible.
It is widely expected that the US will finally ratify the 1.9 trillion US dollar stimulus package by Joe Biden’s Democratic Party this week, which has been taken very favourably by markets in recent weeks helping US stock markets to record levels.
The US dollar accounts for around 60% of globally transacted FX reserves and ‘risk sentiment’, or investors attitudes and feelings about the future can have a big bearing on the US dollar and currencies closely connected to it, like sterling and the euro.
Where the US dollar had been weakening, dropping to lows of 1.4235 against sterling as we ended February, there has been a shift in sentiment which could see the US dollar stronger ahead.
The OECD report mentioned believes the stimulus measures will add 1% to global growth for 2021 and help the US economy grow an extra 3.8% this year. The US dollar can rise and fall on the global economic outlook and such news did see the US Dollar slightly weaker yesterday although as mentioned it has been rising in the face of changing economic winds ahead.
Next week, we have the latest US Federal Reserve Interest Rate decision on the 17th which could well influence more global sentiments and therefore the pound too as explained above.
The very measures which have kept the US dollar weaker in recent months, that of the stimulus plan and continued global optimism, are now being seen as likely to cause inflation (rising prices) and also economic growth that will warrant the US Federal Reserve needing to consider interest rate hikes in the future.
The question of whether the US dollar has now bottomed out is becoming more and more pressing as the recent move on GBPUSD over 1.42 sees the level back under 1.40 currently trading in the 1.38’s.
With lots of focus on the extent to which there has been a turning point in the currency markets as the world gently emerges from the worst of COVID-19, tomorrow’s ECB meeting and next week’s UK and US interest rate decisions look likely to provide plenty of news to influence the FX markets ahead.
For more information and detail on any of the points raised please do get in touch to discuss further.
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