Ellie Allen

Pound Continues To Strengthen Despite Worrying Economic News


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Pound/US Dollar (GBP/USD) climbs to $1.34
Pound/Euro (GBP/EUR) strengthens to €1.12
Euro/US Dollar (EUR/USD) climbs to $1.20
Pound/Australian Dollar (GBP/AUD) slips to AU$1.81

The Pound continued to make gains in August, despite some shaky economic figures and news that the UK economy had been hard hit by the measures taken to slow the spread of the Covid-19 virus. One reason it was able to march higher was the US Dollar falling back on markets as it continued on its weakening path. The Pound even put in some gains against the Euro, which is clinging on to its recent strengthening trend, although it did slip back against the Australian Dollar.

It was perhaps surprising that the Pound has held onto its recent strength as, at first glance, there doesn’t seem to be anything offering support aside from some buoyant retail sales figures. News that the UK economy had been harder hit than any other major economy by the Covid-19 restrictions on businesses and travel was shrugged off by markets. Similarly, a lack of progress in Brexit talks with the EU was also discarded. Instead, investors were happy to buy the Pound on the basis that central banks all over the world are flooding the market with liquidity, causing traders to move funds out of safe havens.

BANK OF ENGLAND SAYS IT WILL CONTINUE TO PUMP MONEY INTO THE ECONOMY

The Bank of England chief Andrew Bailey issued soothing noises about the UK economy, saying that quantitative easing (QE) would be longer lasting and more extensive than previously indicated. Mr Bailey, speaking online to the Jackson Hole convocation of central bankers said “We are not out of firepower”. He went on to explain that central banks had been “too cautious” when it came to stimulus measures, and that by “going in big and fast” the UK economy could be given a shot in the arm to help it recover.

POUND TO US DOLLAR (GBP/USD) RISES HIGHER AS DOLLAR STRUGGLES

This summer has been a good one for the British currency, and August was the latest month in which the Pound put in a strong performance against the US Dollar. Despite data revealing that the UK economy had fallen into its deepest depression since records began, hopes that a Covid-19 vaccine could be developed here, as well as a global move into risk correlated currencies, kept Sterling buoyant.

The Greenback proved unable to gain any ground against Sterling in August, with GBP/USD rising from $1.31 at the beginning of the month to end up at a rate of $1.34 by the end (and had risen to $1.35 by September 1). US Dollar weakness was largely put down to an upsurge of investors moving their money into ‘riskier’ currencies, such as the Australian Dollar, where yields are higher. The resignation of Japanese PM Shinzo Abe didn’t help the US Dollar either, with demand surging for the Yen, which is a rival safe haven.

EURO STRENGTHENS – BUT HAS IT HIT A PLATEAU?

The European single currency has benefitted from the weakening US Dollar all summer long, and August was another month where this trend continued. The robust recovery of the Eurozone from the Covid-19 related restrictions had impressed markets, keeping EUR strong, but there are signs that this recovery could be running out of steam as concerns arise about a potential second wave of virus infections coming this autumn.

While economic data releases for the Eurozone were generally good, there was a cloud on the horizon in the form of the latest PMI (Purchasing Managers’ Index) figures. The PMIs proved to be flat, or at least not as robust as expected, and as these are forward-looking this gave analysts a sense of unease that the Eurozone recovery may soon run out of steam.

There was also some worrying economic data from Germany – the powerhouse economy of the Eurozone – which showed the export-led country was slipping into a period of deflation. For this reason, market analysts will be looking out for any more signs of Eurozone weakens in September, and if they spot any we can expect to see the Euro lose some of its recent strength.

GBP/EUR entered August at a rate of €1.10 and had risen to €1.12 by the end.

POUND FLUCTUATES AGAINST THE CANADIAN DOLLAR BUT ENDS UP UNCHANGED

The Canadian Dollar strengthened against the Pound during the early part of August only to fall back again towards the end of the month to finish off unchanged. One of the reasons for this rebound was Canadian GDP figures, which proved to be stronger than anticipated over the short term, but weaker than expected on the more important annual rate.

GBP/CAD started off the month at CA$1.75 and ended unchanged, despite dipping as low as CA$1.72 at one point.

POUND SLIPS AGAINST AUSTRALIAN DOLLAR AS INVESTORS SEEK YIELD

August saw a reversal of fortune for the Pound against the Australian Dollar as the latter continued to appreciate, outpacing Sterling. With more signs of economic recovery in China – Australia’s biggest trade partner – there was hope that the Australian economy would ride on the Asian giant’s coat tails.

Reserve Bank of Australia chief Philip Lowe put this sentiment into words, stating “The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930’s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia.” At the same time the “Aussie” benefitted from a surge in demand from rising risk sentiment as investors sought out higher yielding currencies.

GBP/AUD went into August at a rate of AU$1.83 but had slipped to AU$1.81 by the final trading day.

WHAT TO LOOK OUT FOR IN SEPTEMBER

September could see the Pound continue to strengthen against the majors if the US Dollar continues on the long descent it has been on since before summer. At the same time there are a number of factors that could come into play to influence the UK currency one way or the other, the major ones being:

Coronavirus: Sterling is susceptible to any upsurge in virus cases as it has become more of a risk-correlated currency since the Brexit vote. Nevertheless, investors seem happy to continue buying Sterling as long as the Bank of England maintains its stimulus measures and the government enacts policies to rescue the economy.

Brexit talks: Due to resume on September 7, so far there has been no breakthrough in terms of a trade deal between the UK and the EU. The main bones of contention are fishing rights and the so-called level playing field, which concerns state support for businesses and important sectors. Hopes of a deal being struck in September are low, with even the negotiators themselves seeming to say such a breakthrough is highly unlikely. A crunch summit is due to take place in October, by which time we will know whether there is a trade deal or not.

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