The Pound generally strengthened during March, although there was some volatility, especially against a rising US Dollar. At one point, Sterling hit a 35-month high against USD, and a 13-month high against EUR, but the advantage against the Dollar wasn’t to last as risk appetite fell away during the second half of the month.
Sterling’s continued good form can mostly be ascribed to the success of the UK vaccination campaign, which has now seen more than 30 million people receive at least their first jab. This is being directly compared to efforts in the EU, which has seen a much smaller percentage of citizens inoculated, causing a so-called ‘vaccine differential’ to drive the relative strengths of the Pound and the Euro. The budget at the start of March was widely hailed as appropriate for the particular circumstances and helped bolster the Pound.
Meanwhile, the Pound lost out to the Dollar which has been steadily strengthening in reaction to a decrease in risk appetite caused by factors related to Covid-19, as well as President Biden’s $1.9 trillion stimulus package.
Back at the start of March, Chancellor Rishi Sunak’s budget laid out tax and spending plans for the next three years to help mitigate the effects of the Covid-19 related damage to the UK economy. Broadly focused on economic stimulus measures, such as grants for businesses, and an extension of the wage support scheme, there were no major tax rises planned until 2023. The budget was generally well-received by markets, providing the Pound with a firm footing for the first part of March.
As the month continued, a row erupted between the UK and the EU over both the safety of the UK/Swedish manufactured AstraZeneca vaccine, as well as allegations of withholding its export. This disagreement generally did more harm to the Euro than the Pound, and a rising surge of new Covid-19 cases across the EU put further pressure on the single currency.
On the last day of March, figures revealed the UK economy had grown by more than anticipated in Q4 2020 and came hot on the heels of better-than-expected business confidence numbers. A 1.0 percent GDP growth rate had been forecast but the 1.3 percent that was revealed caused some analysts to declare the economy had now regained its stability.
Earlier in the month, Bank of England governor Andrew Bailey had added to this upbeat feeling, saying that he was “more positive” about the economic situation in the UK, stating that pent up demand and higher savings could unleash higher levels of consumer spending and growth during the second half of 2021.
The US Dollar found itself on a rising tide in March as a number of factors combined to make it more appealing to investors. US economic data continued to show signs of strengthening, with the Fed forecasting lower unemployment and better growth, while higher bond yields boosted appetite for the Greenback. This saw the US Dollar index (DXY) buck its recent trend and rise from 90.8 to 93.2, which is a four-month high.
But it was the passing of President Joe Biden’s huge $1.9 trillion stimulus plan that really put the wind in the sails of USD. The new money is slated to help put the US economy back onto a faster growth track, and includes payments to firms, individuals and states. In the immediate wake of its passing, this initially weakened demand for the safe-haven US Dollar as investors saw the global economy also benefitting from the wave of new money.
However, it wasn’t long before fears surrounding global risk crept back in, due to a third wave of Covid-19 infections in Europe, and the growth differential this is likely to cause. As a result, USD/EUR rose from €0.83 to €0.85.
This growing appetite for USD saw the Greenback rise against the Pound from £0.72 to £0.73 over the course of March.
The Euro was hit by continued weak demand as the speed of the Covid-19 vaccine rollout across the Eurozone combined with a surge of new cases across the European continent saw investors shun the shared currency. Safety concerns over the AstraZeneca vaccine caused several countries, including Germany, to temporarily halt its use, while delivery problems and supply issues also caused issues. Meanwhile, Germany, France and other countries extended the lockdown measures, causing concerns about a widening divergence between Eurozone economic activity and the rest of the world.
Eurozone GDP data from the fourth quarter seemed to underline the challenge faced by the bloc, as a 0.7 percent contraction was revealed. What’s more, German retail sales slipped by a sizeable 8.7 percent in January, adding to fears that consumers are failing to help pull the bloc out of recession. What this added up to for the Euro was a 1 percent loss against the Pound and a 2.5 percent loss against the Dollar.
It wasn’t all bad news in the Eurozone, however, as the latest flash PMI survey revealed nuts and bolts economic activity was picking up, with German manufacturing picking up stream. The Eurozone composite index as a whole posted a figure of 52.5 for March, indicating a modest return to growth. Nevertheless, Chris Williamson, the Chief Business Economist at IHS Markit, added a note of caution, saying: “The eurozone economy beat expectations in March, showing a much better than anticipated expansion thanks mainly to a record surge in manufacturing output.’ ‘The outlook has deteriorated, however, amid rising COVID-19 infection rates and new lockdown measures. This two-speed nature of the economy will therefore likely persist for some time to come, as manufacturers benefit from a recovery in global demand but consumer-facing service companies remain constrained by social distancing restrictions.”
This, in itself, wasn’t enough to boost demand and the Euro weakened still further against the Pound in March slipping from £0.87 to £0.85.
It was back in February that we saw the Australian Dollar suffer a reversal of fortune following months of uptrend, and this pattern continued throughout March, seeing AUD slip against its main rivals. A number of risk events drove investors away from AUD, including rising tensions between the US and China, an upsurge in Covid-19 cases in Europe, and the impact of global trade caused by a container ship getting stuck in the Suez Canal and blocking all traffic for a week.
It wasn’t just the US sabre rattling at China, Australia joined in after the Chinese government slapped substantial tariffs – as high as 218.4 percent – on Australian wine exports, threatening to take the country to the World Trade Organisation. Disputes over wine aside, news regarding Australia’s Covid-19 vaccine rollout also cast a shadow, with missing shipments and a lack of needles hindering efforts and hurting the economy.
There was, however, good economic news as figures revealed the economy grew by 3.1 percent in Q4 2020, which was the best ever quarterly result and a much faster rate than had been expected. Despite this, it was global risk appetite – or the lack thereof – which drove AUD lower in March.
As a result of this risk-related weakness the Pound was able to rise a cent against the Aussie, climbing from AU$1.80 to AU$1.81 by the start of April.
April will see a pickup in pace of the gradual reopening of UK economic sectors, including the beleaguered hospitality branch. 12 April will see hotels, bars and restaurants reopen, albeit with outdoor dining, and as long as the surge in cases seen in Europe does not spill over to the UK this should help bolster demand for the Pound. The hope is that once better weather returns and hospitality and nonessential retail reopens, UK citizens will use their recently accrued savings to create a consumer led recovery.
If the so-called vaccine differential – the difference in numbers between vaccination rates between countries – widens between the UK and the EU, this is likely to cause a further boost to the GBP/EUR exchange rate, all other things being equal. At the same time, Euro investors will be looking to see if more stimulus measures are forthcoming from the European Central Bank, perhaps matching to some extent those initiated by Joe Biden in the US.
USD could continue to strengthen unless there is a turnaround in risk sentiment. Higher inflation in the US could continue to cause higher bond yields which in turn will increase demand for the Greenback, so all eyes will be on the inflation data when it comes out. Additionally, the Q1 growth report in late April has the power to influence USD rates.
Finally, for the Australian Dollar, April could prove to be a pivotal month as the government’s JobKeeper programme winds down. Designed to minimise unemployment throughout the Covid-19 crisis, its removal could cause an upsurge in joblessness. As unemployment is a key policy indicator for the Reserve Bank of Australia, any sudden increase could have implications for interest rate changes.
The Q1 2021 GBP/EUR bank averaged forecast is €1.14, while the forecast for GBP/USD is $1.36.
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