GBPEUR figures continue to trade around a nine-month high not seen since May last year and there seems to be little signs that this growth is expected to slow. GBPUSD broke into the 1.37 range again yesterday as it has done repeatedly and appears that 1.38 has been set as the new key resistance level that as yet has not been able to be breached. Whilst current levels reside amongst a 2.5 year high, there is still the possibility of sterling reaching new highs. ING bank is predicting that by June we could see another 8 cents gained against the US dollar up to 1.45 and a shocking 1.53 by the end of the year! Their predications are more somewhat bearish for GBPEUR with 1.16 by mid-year and 1.17 at end of year being on the cards.
Two main components likely make up these gains. Now that more than 5 weeks have passed since the Brexit departure, which was a relative non-event for sterling, there hasn’t been significant scrutiny over the deal which would be expected considering the importance of the agreement.
Consequently, the potentially undervalued pound could be gaining ground as the benefits of deal come to the fore, which are especially important in timings of economic uncertainty and rising unemployment.
The second currency stimulant emanates from the UK’s vaccine rollout. With more than 12 million vaccinations at more than 400,000 daily, this number is set to accelerate exponentially.
This will undoubtedly speed up the economic recovery and provide the possibility of fewer or even no future national lockdowns if its citizens are protected.
The Bank of England governor Andrew Bailey is set to make a speech on Wednesday following the decision to keep the 0.1% interest rates on hold for at least another 6 months before considering negative rates. Whilst this came as another boost for the pound last week, Bailey’s tone and plans for what is in store for the UK this year can have lasting implications for the currency in question depending on if the announcements are expected to be optimistic or concerning. It will be worth keeping a close eye on with the announcement coming at 5pm.
On an economic data standpoint, interest will turn to the UK’s GDP announcement for December and Q4 this Friday. With many analysts seeing the possibility of a double-dip recession, this release could carry weight for sterling depending on the outcome. Currently, FX Street see a large fall from the previous 16% to barely breaking even at 0.5%. This is likely to induce weakness for the pound as such a significant drop in economic activity will have its ramifications on consumer spending and market optimism.
EURO CONTINUES TO FEEL IMPACT OF SLOW VACCINE PROGRESS
The euro has begun to fall away as markets are now starting to take into account its vaccine shortfall paired with its economic issues within the bloc. Comparatively, Europe has only vaccinated 3 per 100 people for Dose 1 of their respective vaccines whilst the US is fairing better at 11-12 and the UK flying at 16, with plans to provide 24/7 vaccination centres shortly. As a result, the euro has also started to weaken against the US dollar. Whilst the single currency has enjoyed almost the whole of 2020 to grow against USD up to a peak in the 1.23’s at more than a 2-year high, mid-market rates last week fell into 1.19 territory and have since been trading within the 1.20 range. Recent predications from James Athey at Aberdeen Standard Investments suggest that he believes the trend could continue and decline to 1.17 in the coming months which would represent almost a 5% fall in the currency pairing.
It goes to show just how much markets are now basing currency strength off of vaccination output and economic recovery. Bloomberg have even made forecasts that the shortfall in vaccinations within the eurozone has created €100bn in future debt. This is based off of slower reopening of hospitality services and a variety of other industries which will not be allowed to open until the public have been immunised. It is these reports which can have such detrimental impacts to the bloc’s currency and may mean a long, uphill battle until a more level playing field is established against other economies.
Lastly, economic data is light on the ground for Europe with just German Consumer Price Index (CPI) on Wednesday which is expected to remain unchanged at 1.6%. Understandably, any movement away from these predictions could create some movement for the euro but with the current trends at the moment, it looks like the only direction could be southward one.
‘R’ NUMBER IN THE US A SOURCE OF CONCERN
Just like in the UK with its South African variant and higher infectivity rate, the US is suffering from the UK variant dubbed B.1.1.7. Vaccinations within the US remain strong and will continue to grow under the Biden administration.
However a twinge of uncertainty still remains in the air as to how quickly the US can get the virus firmly under control and bring the R rate to below the vital 1.0 level that the UK has managed. Until that point in time, it will remain difficult to determine which direction the USD may take. However, with the most globally traded currency pairing, the EUR/USD, becoming a one-sided battle in favour of the US dollar, it could be a good indicator of better times ahead. Question is, is this movement purely just based on euro weakness as opposed to USD strength?
From economic data out recently, last week saw 50,000 jobs return to the market for January which is up from December’s reduction of more than 200,000 jobs suggesting that another aspect of economic recovery is underway.
Coming up this week, US CPI on Wednesday is not expected to cause any major changes with figures remaining relatively uncharged around 0.1-0.2% levels. More weight will be at stake for the US Federal Reserve chairman Jerome Powell who will also talk tomorrow. He may provide some further insight into Biden’s fiscal policies he has outlined for 2021. This should come with a lot of commentary considering Richmond Fed president Tom Barkin statements. He highlights concerns that Biden’s $1.9tn stimulus package could create a spike in inflation levels and result in a price spike that people who are either unemployed or in other financial difficulty would struggle to endure. Regardless of which way the recovery plans are perceived, the speech on Wednesday should be one to watch and could lead to see volatility for the USD. Should this be the case, get in touch with your account manager at Foreign Currency Direct to prepare for any market movements ahead of time.
– Foreign Currency Direct