After a bright start to February the pound spiked in value yesterday afternoon, providing sterling sellers with an opportunity to exchange their pounds at some of the best levels seen in some time.
The pound to euro exchange rate reached the highest level since the first half of May last year, making yesterday’s high of 1.1426 the highest level seen in almost 9-months. Cable (GBP to USD) remains around the top of its annual trading range, which is also the highest levels since May of 2018 after the US dollar has weakened in recent months. Yesterday it almost broke the 1.37 level.
The spike in sterling’s value was due to comments made by Bank of England Governor Andrew Bailey at the Bank of England’s Monetary Policy Report at lunchtime. There are no major monetary policy updates to announce and the base rate of interest will be kept at 0.1% for now, and there were no changes to the current Asset Purchase Facility, which is part of the central banks financial stimulus package.
Sterling reacted to comments from Governor Baily, as he declared that Britain’s economic performance is nowhere near as bad as official records have shown when compared with other countries. During the first lockdown the UK suffered to a greater extent than many of our economic peers due to the heavy reliance on the services sector in the UK.
Governor Baily also eased concerns that negative interest rates could be implemented by the BoE in the short-term future, ruling out the possibility for at least another 6-months. This gave sterling the impetus to break above 1.14 quite considerably as some economists had expected negative rates to be considered sooner than in 6-months’ time.
Our clients hoping that the pound will climb higher should be weary of the potential impact of an interest rate cut in the future, as the base rate is already at a historic low (0.1%). Generally speaking, interest rate cuts tend to put downward pressure on the underlying currency, so this topic is worth following.
There are no economic updates scheduled for today, but Governor Baily will be speaking again this afternoon at 1.30pm so any further references to future monetary policy could also impact GBP exchange rates. Non-Farm Payroll figures released at the same time could also influence GBP to EUR if there is any spill over from the worlds most traded pair in EUR/USD, so that’s also worth being aware of.
Of the three major currencies (GBP, EUR and USD) we tend to focus on for our market reports here at Foreign Currency Direct, the euro appears to be the weaker of the three at the moment. The recent movements between GBPEUR are covered in our GBP section of today’s report, and recent price changes for EURUSD have also been negative for euro sellers. The EUR/USD rate has also been weakening recently, and its fallen to a 2-month low after losing over 3% in just the past month. The single currency has also lost around 3.5% against the pound over the past month to put things into perspective.
Sentiment towards the euro appears to be shifting to the downside now, especially after the trading bloc has been lagging behind its peers in regards to the roll-out of Coronavirus vaccinations. Owing to the EU trailing its peers in this area, the expectation from market analysts is that the economic recovery within the area will take longer, which is perhaps one of the main reasons for the fall in the euros value recently. This uncertainty is expected to continue as the EU is struggling to obtain the number of vaccinations they need, and the matter has even caused increased tensions between the UK and the EU, with AstraZeneca in the middle of the squabbling. Until these issues are addressed there could be further downside movement for EUR exchange rates, so this may be worth considering if you plan to convert euros into pounds or another major currency pair.
Economic data is also showing signs of a slowdown within the trading bloc, with January’s PMI readings showing that business activity within the Eurozone declined in January compared to December 2020, with the services sector being the main area of concern.
Economic data releases out of the Eurozone as a whole remain light both today and next week, but Germany has quite a few key releases next week such as inflation and industrial production data. These updates are worth being aware of, as Germany is the main driving force being the Eurozone’s economy.
Today marks the first Friday of the calendar month which is always met with a lot of anticipation within the financial markets. On the first Friday of each month, the US jobs market with the exception of the agricultural sector is covered in what the markets call Non-Farm Payroll figures. This data is released at the same time as the Unemployment Rate for the US, and it is usually released at 1.30pm UK time which will be the case today.
Due to the significance of the release, there can be some major market movements for currency pairs, especially those involving the USD. We also suggest clients avoid trading during the release in case of volatile market conditions.
It has almost been a month since Joe Biden, the new US President was inaugurated so his cabinet will be hopeful of some positive figures to get them started in the first month of his 4-year term. Expectations are for 50,000 new jobs so expect any major deviations from this Non-Farm Payroll figure to potentially move markets. The Unemployment rate is expected to stay the same as December at 6.7%.
Some economic analysts, such as those at ING for example expect to see the USD continue to weaken as the year progresses. Earlier this week ING predicted that GBPUSD will be trading at 1.45 by the end of June and at 1.53 by the end of the year. Whilst there are other analysts and economists that disagree this rate prediction stands out as Cable hasn’t traded at either of those levels since the Brexit vote, which is now almost five years ago.
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