During trading hours yesterday, sterling rose to reach it highest level against the euro in eight months, peaking at a level of 1.132 on the interbank. Sterling’s value has been steadily increasing since the start of the year, and initially broke the 1.13 level during trading on Wednesday. The pound gave up some gains towards the end of the day but was holding a level of 1.129 at the time of writing.
This steady increase for the pound started when reports broke of significant progress in trade talks between Brussels and the UK at the end of last year. The subsequent Brexit deal, announced on Christmas Eve, helped allay fears of an abrupt and disorderly end to the UK’s relationship with its European partners.
Charles Diebel, head of fixed income at Mediolanum Asset Management, said the recovery in the currency was “a function of avoiding the worst effects for a hard Brexit, combined with a very aggressive Covid-19 vaccine plan”. He added, the speedy rollout of Covid jabs “hopefully means the UK recovers at a faster pace, once immunity is established, and thereby the chances of an economic recovery accelerating are higher in the UK than in Europe,” Giving a statement in the Commons, Health Secretary Matt Hancock said, “we’re giving nearly 200 vaccinations every minute and the immense infrastructure in place is protecting the vulnerable and giving hope to us all”.
Against the dollar, sterling rose to its highest level since April 2018, with the interbank rate hitting 1.374 before retreating to a level of 1.372 at the time of writing. The key driver to GBPUSD continues to be the increase rise in risk appetite that is weighing on the safe-haven USD.
The latest catalyst for Sterling strength came as the Office for National Statistics (ONS) released December’s inflation figures. A month-on-month bump in the consumer price index of 0.6% was slightly more than economists were expecting, and higher than the 0.3% rise reported in November. Higher inflation makes it less likely that the Bank of England (BoE) will make further cuts to interest rates that would in turn dent the value of the pound. Sterling jumped against both the dollar and euro last week when, Governor of the Bank of England Andrew Bailey said that there were ‘lots of issues’ with cutting interest rates below zero and that such a move would hurt banks.
Analysts from Danske bank believe that sterling will strengthen further throughout 2021. Forecasting an average of 1.136 for GBPEUR in the next three months and 1.149 for the next six-twelve.
The Coronavirus pandemic still poses a serious risk to the Eurozone economy; the new year began with stricter social restrictions and national lockdowns in many of the nineteen countries that share the single currency. Germany has recently extended its national lockdown until the 14thFebruary. The Netherlands plans to impose a curfew between the hours of 20:30 and 04.30, and from Saturday will ban visitors arriving in the country from the UK, South Africa and South America. The new restrictions mean anybody flying into the country will need to take a rapid antigen test, on top of the already existing requirement for a negative test within 72 hours of departure. France increased curfew hours earlier this month, and Portugal will close schools from this Friday.
European leaders are hoping to accelerate vaccinations in the coming months, as a strategy to contain the spread of the virus and aid states in their economic recovery. The European Commission has called on member states to accelerate their vaccine rollouts, with the aim of 70% of the adult population across the bloc to be vaccinated by the end of summer. The EU has sealed six vaccine contracts for more than 2 billion doses, enough to vaccinate 380 million people, more than 80% of the bloc’s population.
The European Central Bank’s (ECB) policy meeting took place yesterday, where the decision was taken to leave interest rates and their stimulus package unchanged. The ECB did state however, that it is ready to update its policies whenever necessary. ECB President Christine Lagarde stated, “We continue to stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner.”
The ECB stepped up its massive stimulus program in December to support the economic recovery in the region. Its Pandemic Emergency Purchase Programme was extended to March 2022, totalling 1.85 trillion euros in bond purchases. This allows Eurozone governments to get cheaper rates when borrowing from public markets. Lagarde has commented “Our policy measures, together with the measures adopted by national governments and other European institutions, remain essential to support bank lending conditions and access to financing, in particular for those most affected by the pandemic,”.
The euro strengthened slightly against the dollar throughout the day’s trading but has remained largely unchanged by the ECB’s meeting, Danske bank have forecast 1.22 for EURUSD in the next three months, expecting largely range-bound moves between 1.20 – 1.24.
The dollar fell against a basket of currencies, as unemployment in the US continued to rise amid a surge in Covid-19 cases. Yesterday, the labour department’s reported Jobless claims totalled 900,000 which was slightly below the Dow Jones prediction of 925,000 and lower than the previous week’s total of 926,000. US stocks however opened higher amid the expectation that the new Biden administration will deliver a speedier vaccine rollout and further pandemic relief.
The Democrats took narrow control of the senate on Wednesday to give the party control over both houses of congress, as well as the white house for the first time in over a decade. Mitch Mconnell, former majority leader of the senate has pledged to work together with the new Democrat leader Chuck Schumer and President Biden. Republicans have signalled a willingness to work on Biden’s $1.9 trillion stimulus plan that includes $1,400 direct payments to American adults, increased unemployment insurance and a $15 an hour minimum wage.
However, the Democrats’ majority in the Senate of 3 means the house is split 50-50, and any obstacles in the passing of Biden’s relief plan could impact the US economy’s ability to recover and therefore impact the value of the greenback. If you have any upcoming transfers involving the dollar speak to account manager who can keep you up to date with events.
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