There is likely to be a period of ongoing volatility as the UK and EU test the new trading relationship following the end of the transition period. UK trade data released on Friday showed UK exports to the EU fell 40.7% in January whilst imports dropped 28.8% signalling problems for trade.

Bank of England Interest Rate hike?

Bank of England Interest Rate Decision

The Bank of England will meet on Thursday for the latest interest rate decision. Whilst no change in policy is expected any ongoing guidance on its expectations for the anticipated economic rebound could help direct sterling exchange rates further.

Kamal Sharma analyst at Bank of America said “Whilst the UK’s handling of the pandemic in 2020 was lacking, it is stark contrast to the highly effective vaccine roll out in 2021. We see little reason why sterling cannot continue to extend the current rally.”

The FT reports that Vasileois Kgionakis, head of currency strategy at Lombard Odier said currencies had come under “brutal pressure” against sterling as a result of the rapid vaccination programme and improving infection numbers.

Those looking to travel to France for property related reasons will be pleased to hear that France opened its borders to British travellers who no longer need a compelling reason to travel. Restrictions will remain in place including taking a negative Covid test 72 hours before travel.

ECB Forecasts Rebound in Economic Activity

The European Central Bank (ECB) announced on Thursday that it will speed up bond purchases under its €1.85 trillion pandemic emergency purchase scheme (PEPP). The ECB has approximately €1 trillion left to spend. The announcement has reassured investors the central bank is willing to intervene to help the stuttering recovery. This willingness to respond may offer some support for the euro.

The ECB also forecast a rebound in economic activity. ECB President Christine Lagarde said "Looking ahead, the ongoing vaccination campaigns, together with the gradual relaxation of containment measures - barring any further adverse developments related to the pandemic - underpin the expectation of a firm rebound in economic activity in the course of 2021." Her comments suggest the medium-term outlook for the EU is improving which may help euro exchange rates. 

EU inflation data is released on Wednesday and will be keenly watched after January's data saw a rebound in the numbers following months of falling prices.

Lack of Monetary Policy Action Hampers USD Recovery

American Rescue Plan Act

The American Rescue Plan Act of 2021 was signed into law last Thursday March 11th. The $1.9 trillion relief package has far reaching implications for the US and the global economy. Stimulus cheques this week are being posted to Americans to help support them and the economy. Individuals receive $1400 with $1400 more for each dependent. 

Irwin Stelzer writes in the Sunday Times "A middle-class couple with two children, earning up to about $150,000 will receive $5600 on top of the $2400 received from prior relief bills, even if fully employed during the pandemic, adding to the tsunami of cash about to descend on the economy."

The US dollar has already been strengthening in recent weeks after the pound reached a near three year high against the dollar.

The US Federal Reserve meet on Wednesday for the latest interest rate decision. No interest rate change is expected although any guidance on inflation will be of importance. 

With such a high level of stimulus, there are some fears emerging that the economy could overheat raising the risk of high inflation, which could lead to interest rate hikes.

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A deal following Brexit may be in place but some of the detail on trade and the future relationship is still unravelling. The Financial Times reports that one senior EU diplomat said "Now it looks like it is going to be quite a tough and rough relationship for the foreseeable future." He added there may be tactics employed including stalling EU decisions on market access for the City of London in response to what the EU deems as provocation.

On Saturday, Boris Johnson said that the Northern Ireland protocol was not working as he had expected and needs to be "corrected". He added he would like to "iron out" these issues before deferring to the courts for a decision. 

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