Ellie Allen

Pound Continues To Strengthen As Vaccine Differential Grows Wider


6 min read

Share

Opening an account with Currency Solutions is completely free and you’ll be able to make currency transfers anytime at our excellent exchange rates.
Pound/US Dollar (GBP/USD) fluctuates around $1.38
Pound/Euro (GBP/EUR) rises to €1.16
Pound/Australian Dollar (GBP/AUD) up at AU$1.80

The Pound continued to climb on the markets during February, hitting an almost three-year high against the US Dollar when it touched $1.40. It also reached highs against the Euro when it reached €1.16. The main thing driving the Pound higher was the speed of the Covid-19 vaccine rollout in the UK compared to in other nations. The 20 million milestone was reached, boosting confidence in the economy being able to open up sooner rather than later. As of 8 March, 31 percent of UK citizens had received at least one dose of vaccine.

At the same time, PM Boris Johnson announced the lockdown would be ended in stages, saying that all restrictions would be lifted by 21 June. There was good news too when it became clear that the UK had avoided a double-dip recession last year, however the main news revolved around the 2021 Budget, which was billed as the most important in peacetime history.

POUND NEWS: RISHI SUNAK’S BUDGET RAISES TAXES TO PAY FOR COVID ‘BLACK HOLE’

Last week saw the chancellor Rishi Sunak deliver his Budget to the House of Commons. Mr Sunak has already warned that the Covid-19 pandemic has taken an ‘enormous toll’ on public finances – with some £300 billion spent in the last year – and fears had taken hold that the levels of taxation needed to pull the economy out of a slump would in turn hold back the recovery. The ‘black hole’ at the heart of the UK economy is an estimated £1.8 trillion debt, much of which has been amassed over the last 11 months.

In the event, the chancellor opted to increase taxes to fill the shortfall in the country’s finances but chose to defer the pain for the time being and continue spending on support for workers, shops and businesses. What was announced was a substantial rise in corporation tax paid by companies on profits – jumping from 19 percent to 25 percent – although this will not take place until 2023. At the same time, Mr Sunak froze personal income tax brackets, as well as VAT and National Insurance contributions. There was good news for workers, with an extension of the job retention scheme until October, as well as a rise in the minimum wage to £8.91.

Rishi Sunak told the Commons he would do “whatever it takes” to put the UK economy back on the right track, promising to fix what he called the “acute damage” that had been done. In reaction to his Budget speech, Sterling remained mostly rangebound against the US Dollar and the Euro as much of the detail had been anticipated in advance.

US DOLLAR SHOWS A PAUSE IN WEAKENING TREND AS JOE BIDEN UNLEASHES MASSIVE STIMULUS SPENDING

In February and the early part of March the US Dollar managed to hold onto its strength and break the weakening pattern it has shown over the past few months. However, there were some dramatic spikes in the interim, especially against the Pound. GBP/USD had earlier in the month hit a rate of $1.40 – its highest rate in almost three years, but this was later to fall back again at the start of March.

President Joe Biden’s colossal $1.9 trillion stimulus package passed through the House of Representatives and then the Senate. Eligible American citizens will each receive $1,400 and unemployment benefit will be extended, while there will be a raft of funds disbursed to states to help them deal economically with the economic fallout from the Covid-19 crisis.

With so much newly-created money sloshing around, economists are now worried that it will lead to higher inflation which in turn would force the Federal Reserve to raise interest rates. This explains why the Dollar has found some strength recently, but the big question is how long it can last. Fed chief Jerome Powell tried to sooth fears of inflation in a speech, but investors chose to ignore his remarks, for the most part.

By 8 March, the GBP/USD exchange rate was trading at $1.38, a rate only marginally better than a month ago.

EURO LOSES RECENT GAINS AS VACCINE ROLLOUT STUMBLES AND RECESSION BITES

The Euro didn’t find February an easy month and continued to struggle on the markets. Some mixed economic data revealed a sluggish recovery, as well as the ongoing slow rollout of the Covid-19 vaccine to EU citizens. While cases of Covid-19 are falling across the EU as a whole, an uptick in cases in France, Hungary and the Czech Republic has worried Euro investors. Currently only around 6 percent of the EU population have received a vaccine, compared to over 20 percent in the UK. This difference has come to be known as the vaccine differential.

At the same time the bloc remained in a state of recession as the most recent GDP figures to be released for Q4 2020 revealed a 5 percent quarterly contraction. This makes four subsequent quarters of negative growth. According to these latest numbers, the Eurozone economy contracted by 6.8 percent last year overall, while the German economy – the largest in the Eurozone – grew by only 0.1 percent in the fourth quarter. At the same time, France contracted by 1.3 percent, which was nevertheless better than expected.

The GBP/EUR exchange rate was trading at €1.16 on 8 March and has seen a steady rise from €1.14 a month previously.

AUSTRALIAN DOLLAR STEADIES AS MARKETS CALCULATE RISK LEVELS

The Australian Dollar has been under pressure of late, but in February it generally managed to hold onto its strength even in the light of some stock and bond market turbulence in the wider world. While the commodity-linked and risk-sensitive Australian Dollar had seen almost a month of straight gains as risk sentiment improved, Joe Biden’s US stimulus plan sparked fears of inflation in markets, leading to a reassessment of Fed interest rate expectations. This proved too much for the Australian Dollar, which immediately relinquished three weeks of gains.

However, a reversal came when risk appetite picked up again towards the end of the month and the Aussie managed to claw back its losses to end the month almost unchanged. In the end, the Pound was just able to gain the upper hand, climbing a cent to AU$1.80 by early March.

WHAT TO LOOK OUT FOR IN THE COMING WEEKS

Forex markets will be assessing signals from the US with regard to the $1.9 trillion stimulus bill and how that could affect inflation and interest rate expectations. While the US Dollar seems to be stuck in a holding pattern for the time being, it could very well strengthen again if it seems likely the Federal Reserve will have to take action and raise interest rates. Any such move would send a signal to other central banks that rate rises could be on the cards again, although any such move would likely do huge damage to the Covid-19-scarred world economy.

For the rest of March focus is likely to remain on the so-called vaccine differential between the UK and the EU. This is the primary driver of the GBP/EUR exchange rate at the moment and there are no indications that anything will change in this regard over the next month. Nevertheless, wildcards exist in the form of new virus variants cropping up, any one of which has the potential to destabilise the currency of the region it appears in and have an impact on risk appetite.

Final thoughts

Opening an account with Currency Solutions is completely free and you’ll be able to make currency transfers anytime at our excellent exchange rates.

We appreciate that navigating the currency market can be daunting! So, a dedicated account manager will always be on hand to offer guidance.

Talk to an expert