Sterling exchange rates have had a mixed trading week so far, with the pound reaching fresh 1-year highs against the euro early on Tuesday morning only to drift back down as the week has rolled on.

Analysts have suggested that the pound may have been overbought as positivity surrounded the UK earlier in the week. At the end of the trading week there has been a surprising demand for the euro, seeing the single currency rise in value in the last 24 hours against all but 2 of the G10 currencies.

Overall though, there does appear to be a feel-good factor surrounding the pound at present and investors are certainly beginning to favour the currency over many other majors, with the pound being one of the better performing of the G10 currencies in 2021 to date.

The sheer pace and positivity surrounding the vaccination program in the UK appears to be one of the main driving factors behind the gains we have seen over the past few weeks and with the addition of a clear roadmap for how the UK may head back to some sort of normality in the coming months, it is easy to see why investors and speculators may now be favouring the pound over others.

UK Covid Cases Rise

Another reason why we have seen the pound have a good start to 2021 is due to the uncertainty of a no deal Brexit being lifted, which is a factor that has been keeping the pound low for over 4 years now. There is no doubt that there may still be further bumps in the road regarding the Brexit trade deal and the UK leaving the EU but the mere fact that the road does not have a potential cliff edge fall at the end of it has settled investors and given them a little more confidence in the UK and sterling as a whole.

There are still a number of potential factors that could dampen the pounds spirits so it is important to be aware the there is no guarantee that the pound will keep getting stronger, the most notable being next weeks budget, any new mutation of the virus, any new post Brexit issues or a vast increase in cases which might slow the journey back to normality and economic growth down.

We have very little out in terms of economic data today for the UK so the focus will likely be on vaccinations and any other leaks surrounding next weeks budget, which is a key date for your diary and due on Wednesday 3rd March.

Euro Finishes the Week on a Stronger Footing

In contrast to the positivity surrounding the UK’s vaccination program we have seen quite the opposite within various other countries in the Eurozone.

Despite what has been a strong finish to the trading week, with euro exchange rates gaining against most majors in the last 24 hours, there are still plenty of concerns as to what will happen in the coming months unless there are some fairly substantial changes and the vaccination programmes pick up some much needed momentum.

To date countries such as Germany, Italy, France and Spain are a long way behind comparatively and this has bought concerns as to how these countries are going to open up and have their economies back on track in the months ahead.

Not only have the overall programs been very slow to get going but there is also the challenge that a fair percentage of people within some of the nations mentioned do not wish to have the vaccine at this current time even if they are offered it, which presents a challenge in itself.

Looking back to 2010 and the PIIGS of euro crisis (Portugal Italy, Ireland, Greece and Spain) there is a fair chance that these particular countries could come back to the forefront again and may need assistance should some sort of normality not be forthcoming.

If you take Spain and Greece just as an example throughout this pandemic, they will have lost a huge chunk of their income due to lost tourism last year and it looks like for the start of this year at least they may have a similar issue.

Visitor spending in Spain was down from €91.9 billion in 2019 to €19.7 billion in 2020, a drop of 78.5%, a similar year this year should things not pick up could be catastrophic for the country and would like lead to them needing help, which could weight heavily on euro exchange rates and weaken them off in the months ahead.

Yesterday European Central bank Vice president de Guindos commented that growth figures may be weaker than projections and a lot of this may be down to the factors mentioned above.

Having said all of the above the euro does seem to have a strong backbone as we have once again seen in the past 24 hours, with it bouncing back without any major catalyst. The euro has indeed managed to bounce back and gain strength many times in the face of adversity, so it is not a forgone conclusion that the euro will weaken, but it is one to watch in the coming months, most notably if the UK economy flies out of the traps but the Eurozone lollops along behind.

US Dollar Fights Back Against the Euro and Pound

Dollar Continues to Weaken Against Pound and Euro

For the past few months now It has been suggested that the dollar may be in for a tricky time ahead  and if the last few trading weeks are anything to go by then these predictions are starting to ring true.

For GBP/USD as an example the difference between the high and low point over the past 90 days is over 10 cents, or roughly 8% which is quite a large shift over a three-month period.

With covid-19 deaths breaching the 500k mark this week and a minutes silence being held across the nation it is clear that the sheer amount of devastation coronavirus has caused, both to the health of the public and equally the health of the economy is higher than other areas around the world.

At the time of writing this report, 19% of total coronavirus deaths have occurred in the US, which is of great concern when you look at the fact that the US only accounts for 4% of the world population.

Another reason as to why GBP/USD in particular is climbing is the tightening spread between the UK and US bond yields, with the gap getting ever smaller.

Should the UK continue to close the gap or even start to offer more attractive yields then there may be more demand for Sterling once again, as the yields will be more attractive to investors so money may flood out of the dollar and into the pound, continuing the pattern to sterling gaining against the dollar in the year so far.

As an example – The 2 year bond yield for the US is 0.13% and the UK is 0.06% so currently holding money in a US bond pays a better rate of return, the UK is fast catching up to a stronger and more certain economic outlook and so if the UK does manage to offer a higher yield then much like an individual might choose another bank for a better interest rate, investors may do the same and could flock to the UK which in turn could lead to a flow of money out of the dollar and into the pound.

Given the fact that UK yields were -0.13% a month ago then 0.03% two weeks ago and now sit at 0.06% a continuation of this rise would see UK rates breach the us in the coming weeks.

At the time of writing this report the GBP/USD interbank exchange rate was at the pivotal point of 1.40 after sterling retracted a little overnight, with analysts suggesting that sterling may have been overbought earlier in the trading week.

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