UK Consumer Price Index, also known as CPI or Inflation, is expected to rise rapidly throughout the course of the year according to economists at Bank of America and Pantheon Macroeconomics, who have forecasted 2.5% by late 2021, compared to the Bank of England’s forecast last month of just below 2%.
In January, Inflation was recorded at just 0.7%. This rebound would likely be taken very positively by the market and could see the pound’s value continue to increase as fears over the pandemic’s knock-on effects subside. It is expected that most of the increase could come in the next few months, due to the 50% rise in the price in oil, and domestic energy prices rise from April. Inflation is also likely to see an extra surge in August as restaurant prices will be compared to those of the same time the previous year, when the Government’s ‘eat out to help out’ scheme was in effect.
Bank of England governor Andrew Bailey has stated that the bank will not tighten policy at the first signs of inflation rising, but instead wait for clear evidence that the rate would stay at 2%, and that joblessness was lower before considering tightening its monetary policy. BoE’s Chief Economist Andy Haldane has previously referred to the economy as a ‘coiled spring’, so these are yet further signs that the economic aftermath of the COVID-19 pandemic may not be anywhere as bad as previously thought.
UK Prime Minister Boris Johnson spoke yesterday warning of the threat that the third wave of the Coronavirus pandemic in Europe could ‘wash up on our shores’, with a travel ban from all EU countries now being considered. Holidays will be banned until the end of June, with a £5,000 fine for anyone trying to leave the country without a reasonable excuse to do so. France is also likely to be added to the ‘red list’ this week.
The pound weakened slightly against the euro yesterday, as tensions continued to build over the EU’s potential ban on AstraZeneca vaccine supplies to the UK. An EU spokesperson yesterday said that ‘the UK is not to blame. The EU is not to blame’, but that AstraZeneca has been over-selling its production capacity, and must deliver its promised doses to EU customers. EU leaders are due to discuss imposing a ban on exports to the UK at a summit on Thursday, where Boris Johnson is expected to speak to EU Leaders including German Chancellor Angela Merkel and France President Emmanuel Macron, to try to get them to steer away from banning supply to the UK. The UK’s vaccine rollout has been key to the pound’s recent strength, therefore any risk of slowing down the rollout could cause the pound to weaken significantly. Clients with a short-term currency exchange requirement involving the pound may benefit from speaking with their account manager ahead of Thursday’s summit.
There could be further signs of euro weakness ahead as the German central bank released its latest monthly report yesterday, which suggested that the German economy is likely to slow sharply during this quarter, hitting the services sector, and the construction sector which had previously been booming. This comes just one month after reports that the economy would recover in the Spring as Covid-19 infections fell and vaccines were more readily available. However, this most recent report gave no further signals to expectations of rebounding in the Spring, and also failed to reference its vaccination campaign which has been struggling with momentum following delivery delays and negative reports of effectiveness and side-effects.
The Bundesbank said “The measures to contain the pandemic are more stringent on average in the current quarter than in the previous one,” and “therefore, the economic output in the first quarter of 2021 is likely to decline sharply… particularly in the contact-intensive service sectors.” An increase in sales taxes is likely to have contributed to the slow down in the construction industry in January, which had been temporarily cut last year. Industrial production also fell in January, however order numbers were strong and exports had increased.
Tomorrow brings a host of data releases which have the capacity to create spikes in euro value, including preliminary Manufacturing and Services Purchasing Managers Index (PMI) for March in Germany, and the whole of Europe. Both sectors are expected to improve compared to February’s data, although Manufacturing PMI is the only set which is comfortably above 50 – an index of 50 or above is positive for the economy.
The key driver for euro exchange rates currently is around the EU’s vaccine supply and rollout programme, and is likely to continue to weigh on the value of the euro while supply is limited. EU Leaders will meet at a Summit on Thursday, where UK Prime Minister Boris Johnson is expected to urge the EU not to impose bans on exports of the AstraZeneca vaccine to the UK, which could create volatility for EUR exchange rates.
The number of new COVID-19 cases in the US rose by 5% to over 394,000 last week, which is the first increase after continuously declining for nine weeks straight. However, positive news came yesterday from the White House stating that Johnson & Johnson would come close to hitting its 20 million dose target in March, after shipments had stalled in recent weeks.
Home sales in the US fell to a 6-month low in February, due to bitterly cold weather in many areas and winter storms in Texas and the South, alongside record low supply levels. Rising mortgage rates and higher house prices may not help the situation going forward, however demand is still increasing demonstrated by houses only being listed for an average of 20 days, another record low, before being shown as sold. It is expected that warmer weather and the US vaccine rollout programme continuing to accelerate, alongside a huge fiscal stimulus package, will help the sector to rebound sharply in March.
Tomorrow afternoon will see several data releases which could impact US Dollar exchange rates. Durable Goods Orders for February are expected to fall sharply from 3.4% to 0.8%, which could cause the US Dollar to weaken should these figures be as low as predicted. However, Markit Services and Manufacturing Purchasing Managers Index (PMI) figures are expected to increase, both of which are comfortably above the 50 level, demonstrating expansion in these sectors. Clients looking to transfer US Dollars in the coming days may benefit from detailing their requirements to their account manager ahead of these releases.
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