It has been an impressive run for the pound since the start of the year with the success of the vaccination rollout at the core of a standout 4% jump on GBPEUR exchange rates since the latter stages of 2020.
The vaccination rollout has afforded UK businesses a considerable head-start with investor and consumer confidence quickly building momentum. This trend is particularly relevant when compared to the UK’s counterparts across Europe for example. According to the latest government figures, the UK has now administered over 30 vaccinations for every 100 people across the country, compared to just 8 and 7 in France and Germany respectively.
There is every possibility that Chancellor Rishi Sunak will throw the first curve ball of the year via the Government’s spring budget which is due to round up a number of potential changes taxation, policy and work scheme support.
Will business confidence remain as favourable as we move into the next quarter with a potential rise in corporation tax imposed? Will the enforced changes from Brexit anchor trade figures once more, with supply chains already struggling to manage the drop in efficiency and the jump in costs?
Looking a bit deeper, question marks could also surface around consumer spending levels changes should the Chancellor shift the goal posts around the very popular furlough scheme. Indeed, consumer spending has remained relatively resilient to date but with a further 700,000 people added to the list of Furlough dependant employees in January alone, the ramifications for activity levels across the UK could prove severe should support be cut in the months ahead. Another factor driving the economy and potentially providing added support for sterling in recent months has been the strength of the housing market.
However, the inflated optimism has been well documented within this sector, it will be interesting to see how the market fairs depending on how sharply the stamp duty holiday is withdrawn. Interestingly Labour have urged the Chancellor to focus on supporting a sustainable recovery before raising taxes. A recent poll has marked a drop in confidence in PM Boris Johnson from 60% down to just 44% in the space of a year, highlighting just how polarising a set policy could prove to be should the government be too quick to pull the trigger. We all remember the backlash from the Christmas lockdown.
The Eurozone’s struggles have been well documented in recent months with the lack of consistency across the block’s member states with regards to it’s vaccination program halting investor confidence in the immediate future at least.
Yesterday’s data highlighted the impact of regional lockdowns across European high streets with German retail sales figures in particular posting a 4.5% drop. Investors may not have been overly appeased either after Spanish retail giants Inditex decided to push ahead with their 1,200 store closure world wide despite heavy protests from Spanish unions.
After German regulator’s initially denied full approval to the AstraZeneca vaccine, French president Macron did very little to support the cause after a long string of unconvincing statements of his hit the headlines when quizzed on the Oxford-AstraZeneca solutions.
Clearly the debate around the safety and effectiveness of the vaccinations will play a pivotal roll in the blocks ability to unite and progress out of this crisis in the weeks and months ahead. The European Commission may not have provided much help after it called for leaders to brace themselves for an “Era of pandemics”.
Investors may be looking for an improved landscape here before committing behind the euro any further. Now we are within touching distance of the tourist season, leading European nations are said to be holding it out for a speedy vaccination passporting system to be developed in the hopes this will allow them to open up their coast lines and beaches to international travellers in the near future.
Furthermore, those looking to buy foreign currency with euros might have taken confidence from the recent jump in inflation to 0.9%, although this has largely attributed to the jump in shipping costs since Brexit.
We could be set for an interesting day for GBPUSD exchange rates with Federal Reserve Board of Governors member Lael Brainard due to speak this afternoon amongst a long line of updates inflation releases.
The pound was forced to retreat from the multi-year highs it hit towards the end of last month with business and consumer confidence releases painting a far more positive picture for the US economy than the one initially outlined after the election result at the end of last year.
So much so, that there have been rumours circulating that the Federal Reserve might be tempted into reviewing it’s current stimulus package, something that could help bolster the dollar’s value on the international stage. Brainard’s speech then could hold extra weight with the markets making it a particularly relevant topic for clients with an immediate currency requirement to run by their account manager.
It is worth remembering that to date though, Chair of the Fed Powell has been consistently committed to downplaying the chances of an inflation induced rate adjustment. Instead, the Fed expect a gradual recovery in employment figures before question marks around inflation figures come to the forefront. As a result, it could also be worth planning around Friday’s Non farm payroll release if you are in the market for US dollars and would like to capitalise on these record highs.
There seems to be a growing case for further long term strength for the dollar too. The recently approved single-shot vaccine provided by Johnson & Johnson might well help the US recover the lost ground on their vaccination roll out and importantly help rebuild some faith amongst investors.
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