UK Gross Domestic Product numbers released this morning rose by 2.3% in April, slightly higher than forecast and the fastest growth seen since July 2020 as the lifting of restrictions helped boost output. In the last 24 hours sterling has risen from a low of 1.15852 to current highs of 1.16651 at the time of writing.

Conversations continue as to when restrictions in the UK will be completely removed and whether the government will stick with the initial date of 21st June to relax all measures. It has been reported that contingency plans are being worked out to delay, if necessary. The general feeling is that a small delay possibly of a couple of weeks is looking more and more likely. The 60% more transmissible Delta variant which is spreading rapidly in the UK has now taken over from the Alpha (formerly Kent) variant. The UK recorded its highest number of confirmed daily Covid cases on Wednesday at 7,540 cases and further 7,393 yesterday, the most cases since 26 February. The final phase of easing will now possibly be delayed until 5th July depending on the data in the coming days and weeks and how the markets perceive this could spark renewed volatility for the pound.

Brexit Issues Resurface

Brexit Issues Resurface

Brexit has very much resurfaced this week after news that the EU has threatened Britain with trade tariffs on imports of chilled meats if the UK extends the grace period in the Northern Ireland Protocol.

EU leader Maros Sefcovic said that “Brussels will start a trade war with Britain if Boris Johnson overrides the Brexit treaty so that Northern Irish shops can keep selling British sausages.” He signalled that the UK could face tariffs and quotas adding that “the EU would react swiftly, firmly and resolutely if Britain unilaterally extended the grace period in the Northern Ireland Protocol which expires at the end of June.” Any escalation in the days and weeks ahead of that important deadline could impact on the price of GBP EUR significantly.

The sausage and chicken nugget story ties in in with the G7 meeting which starts today in Carbis Bay, Cornwall. It has been reported that US President Joe Biden may press Boris Johnson on the importance of the protocol at the meeting. The Times reports that America’s most senior diplomat has issued David Frost with a demarche, a formal diplomatic reprimand citing the government has been inflaming tensions. Any developments at the G7 other than the controversy over the choice of location for the summit could see market reaction across the currencies as it could add a new dimension to the markets. Boris Johnson met President Joe Biden yesterday ahead of the summit and said the alliance between the UK and US should be known as the “indestructible relationship”.

Economic Data That Could Impact GBP Rates Next Week

Next week sees UK unemployment data released on Tuesday followed by Consumer Price Index inflation numbers on Wednesday. The inflation data is particularly important and one to watch as there are growing concerns that it will rise sharply in the future which may put pressure on the Bank of England to take action.

ECB Interest Rate Decision and its Impact on Euro Exchange Rates

The European Central Bank (ECB) met yesterday for the latest interest rate decision. Interest rates were held steady at 0% as widely expected. However, the central bank has signalled it will continue with its bond purchases under the Pandemic Emergency Purchase Programme (PEPP) at pace. Rates for GBP/EUR rallied slightly higher after the announcement providing a small improvement for those buying euros.

Despite falling Covid cases and calls for less bond purchases the ECB said “the governing council expects net purchases under the PEPP over the coming quarter to be conducted at a significantly higher pace than during the first months of the year. There have been growing calls for less asset purchases as there are fears inflation will rise sharply as the EU economy is already starting to bounce back.

Recent Purchasing Managers Index data for the manufacturing and services sectors have shown strong numbers which bodes well for that recovery and euro exchange rates. The news though of the higher pace of asset purchases puts a degree of pressure on euro exchange rates.

With no European economic data released today focus moves to EU industrial production numbers released on Monday and inflation data next Thursday. The central banks are keeping a close eye on the inflation data which could spark volatility for the single currency.

US Inflation Rise Fuels Fears of Goods Price Increase

US Inflation Increases by 5%, Highest Jump Since 1992

US inflation data released yesterday arrived significantly higher than expected at 5% in May, the highest jump since 1992. The numbers highlight that US prices are now 5% higher than one year ago. The US Federal Reserve has maintained that this spike in inflation is unlikely to be sustained. However, a jump like this will bring criticism as many argue that the Fed has underestimated the threat of higher inflation. The pound rallied marginally higher against the dollar as the markets digested this latest report although rates were left largely unchanged.

The number of Americans filing for unemployment claims also fell to the lowest level since March 2020 when the pandemic hit the US which bodes well for the US economy.

The Fed will meet next Wednesday for the latest interest rate decision and will be discussing the inflation numbers as well as the recent positive labour market data. US jobs data for May showed a big improvement suggesting the labour market has now turned a corner following the very poor set of numbers released for April. Although the numbers were marginally less than expected, there were still 559,000 jobs created in May, significantly higher than the 278,000 in April. The data will be important in the Fed's decision making and comes at a time when economic growth is on the up with all the stimulus measures in place.

The Fed is widely expected to start the conversation of tapering its quantitative easing programme at next weeks’ meeting which could spark some volatility for the US dollar. However, any action will likely be taken in late summer or Autumn rather than now. Furthermore, the Fed is expected to differentiate between when it tapers and when interest rates will eventually rise to avoid the markets expecting more immediate rate increases. It is expected to provide a long timeframe between these two changes which in theory should create less market volatility. Fed Vice Chair Randal Quarles has said: “It will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.” He added “In contrast, the time for discussing a change in the federal funds rate remains far in the future.”

As the Fed tries to avoid market disruption by signalling interest rates are to rise, it must also avoid inflation becoming embedded which would cause another set of problems in these challenging times for central banks.

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