The Pound has started off 2021 on a strong footing, holding firm against the US Dollar and gaining a cent against the Euro. This might seem surprising at first glance as there has not been much good news coming out about the UK economy. However, as we are becoming used to it by now, economic news now seems to play second fiddle to other factors and the last month has been all about Covid-19 vaccines as far as the currency markets are concerned.
Read on to find out why …
Throughout January and the first week of February, developments around the rollout of the Covid-19 vaccine in the UK have kept the Pound high. For the time being, traders are using the number of people vaccinated as a proxy for economic news to an extent, with the logic being that the sooner the virus passes, the sooner the UK economy can fully open up again.
At the same time, a disagreement between the UK and the EU has threatened to turn ugly. It revolves around the allocation of vaccines made by the Anglo-Swedish pharmaceutical firm AstaZeneca. The row has threatened to spill over into legal action when it was revealed that the EU was only expected to receive a quarter of the 100 million doses it had ordered.
The supply of vaccines is very important to the EU as it struggles to get enough from a Pfizer plant in Belgium, which is having manufacturing issues. The EU is suspicious that UK-made vaccines are being reserved for British citizens, although AstraZeneca and the UK government have firmly denied this. With so much economic activity depending on the rapid rollout of a vaccine, the French and German governments are threatening legal action against the firm.
Meanwhile, the Bank of England (BoE) has delighted Sterling backers by saying there will be no negative interest rates for at least six months. Investors had been concerned that the Bank was contemplating such a move as that would have led to a huge outflow of funds from UK banks – after all, who would want to pay to store their money in a bank rather than the other way round?
The BoE’s reassurance that such a move won’t happen – for the time being – was one of the factors that kept the Pound strong in the first part of 2021.
January was an eventful month in the US. Not only did Joe Biden take over the presidency of the world’s most powerful country, but he also unleashed a flood of executive orders in his first days in office, including nine on his first day. The executive orders – a power given to US presidents to make legislation without it having to be passed through Congress – were mostly aimed at overturning the policies of his predecessor, Donald Trump.
The executive orders included putting a stop to the wall being built on the US-Mexico border; immediately banning travellers from several countries (including the UK) from entering the US in order to halt the spread of the coronavirus; and re-joining the Paris Climate Agreement to limit greenhouse gases. Biden also unleashed a flood of monetary stimulus measures totalling $1.9 trillion to prop up the US economy from the effects of the virus slump.
By 8 February, the GBP/USD exchange rate was trading at $1.37, a rate it is has held onto since mid-January.
The Euro has been flagging in 2021 so far, mostly due to issues surrounding the Covid-19 vaccine problems, but also as a reflection of the US Dollar plateauing. What’s more, some economists are warning that the Eurozone is staring at a double-dip recession. A number of key indicators are showing that production in the Eurozone economy is either flatlining or declining, mostly as a result of the lockdown policies of various EU member states. This sentiment hasn’t helped the Euro so far in 2021.
Coronavirus was also a driving factor for the Euro in January, helping to drive the GBP/EUR exchange rate to a multi-month high of €1.14 last week. As mentioned above, the spat between the EU and the UK over vaccine exports has hurt the Euro, and benefitted the Pound. Germany, meanwhile, tightened travel and trade restrictions in response to the surging virus caseload, with Chancellor Angela Merkel saying that pressure on the nation’s hospitals due to a new virus strain was “unacceptable.”
There have been political developments in the EU as well, with news that former European Central Bank (ECB) chief, Mario Draghi, will be coming out of retirement to take over Italy’s government. The economist, who has no experience of politics, will take over the reins after the former government collapsed into disarray. It is hoped that Draghi’s track record of steering the Euro through crisis can be replicated in his home country of Italy.
The beginning of 2021 hasn’t been so great for the Australian Dollar, which now finds itself struggling once again. You might recall the Aussie’s meteoric rise throughout the latter half of 2020, when investors sought out risk in the hope that the global economy would soon be ‘back to normal’. Well, those hopes seem to have partially evaporated, leaving the Australian Dollar out in the cold once again.
As usual with the Aussie, it’s all about risk sentiment. Right now, we are witnessing turmoil going on in the stock markets, and rumbles of concern over whether the Covid-19 vaccines will be effective against emerging new strains. All of this is bad news for the Australian Dollar, which is why we’ve seen the GBP/AUD exchange rate rise to AU$1.79 since the start of the year.
The strength of the Pound over next few weeks will continue to be dominated by the speed of the vaccine rollout around the UK. Currently, some 12 million people have received a dose, and the government plans for most of the remaining vulnerable groups to have been offered the vaccine by May, making a return to normal economic life possible by the summer. The spat between the EU and the UK is worth keeping an eye on as it has the potential to affect the GBP/EUR exchange rate further.
More widely, watch out for the US Dollar to see whether it starts to reverse the losses it has experienced over the last 10 months. President Biden’s monetary stimulus plan is likely to send it lower, but this could be offset if there is more financial chaos in the stock and bond markets. Similarly, the Euro could weaken over the next month if the economic figures continue to show a slowdown in activity, and there are still issues with vaccine supply.
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