Ellie Allen

Pound Punches Higher as Economic Data Impresses and G7 Puts Focus On Britain


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Pound/US Dollar (GBP/USD) stable at $1.41

Pound/Euro (GBP/EUR) rises to €1.17

Pound/Australian Dollar (GBP/AUD) jumps to AU$1.83

The Pound has held steady against the majors over the last month and has positively surged against the Australian Dollar rising from $AU1.78 to $AU1.83. Earlier on in May, Sterling climbed close to a three-year high as evidence began to pile up that the UK economy was on the up. This evidence included the private sector growing at its fastest pace on record, retail sales rebounding sharply and consumer confidence at a 14-month high. The icing on the cake came on 11 June, when the latest GDP growth figures revealed the UK expanded at a record rate of 27.6 percent in April compared to a year earlier, beating forecasts.

May also saw the government implement the third step of its lockdown easing roadmap. The Prime Minister, Boris Johnson, said that the “roadmap remains on track” and added that the nation would continue “unlocking, cautiously but irreversibly” – although more recently he has hinted that he may backtrack on this promise. Both the GBP/EUR and GBP/USD exchange rates benefited as a result of these restrictions being eased, with confidence in the UK’s economic recovery buoying demand for Sterling. However, lingering fears over the India coronavirus variant tainted what should have been a more optimistic month, limiting some of the Pound’s gains.

POUND NEWS: G7 MEETING INCREASES SCRUTINY ON UK PERFORMANCE

International focus was on the UK as the leaders of the world’s strongest seven economies, minus China, met in Cornwall to set the agenda for the recovery from the coronavirus pandemic. The start of the summit was somewhat overshadowed by a row between the UK and the EU over post-Brexit trade issues in Northern Ireland, with the EU said to be considering taking the UK to court and potentially levying trade tariffs. This should have dented the GBP/EUR exchange rate, but in the event, investors chose to remain optimistic about the situation and the Pound managed to hold onto its strength.

The Bank of England (BoE) continued to hold UK interest rates at 0.1 percent in May, saying that the government’s vaccine rollout was likely to contribute to a rapid recovery of the economy in the months ahead. The BoE further stated in its Monetary Policy Committee’s central forecast that UK GDP would “recover strongly over 2021 to pre-Covid levels,” as lockdown shackles were loosened and “growth is boosted by a decline in health risks and a fall in uncertainty.”

US DOLLAR: SOARING INFLATION BEGINS TO WORRY THE MARKETS

The US Dollar fell back in May after inflation leapt to its highest levels since 2008, with prices jumping by 4.2 percent in the 12 months through to April. This figure was a lot higher that the Federal Reserve’s target of 2 percent, raising fears that the central bank could be forced to raise interest rates. Addressing this concern, the Fed maintained its stance that elevated rates of inflation was merely a temporary phenomenon.

Fed Vice Chair Richard Clarida admitted he was surprised by the unexpectedly high level of inflation but admitted, “We’ve been saying for some time that reopening the economy would put some upward pressure on the price level.” Kathy Bostjancic, an analyst at Oxford Economics, echoed his comment, saying, “We believe part of the acceleration in inflation will be transitory, and we share the Fed's view that this isn't the start of an upward inflationary spiral.”

By 11 June, the GBP/USD exchange rate was trading at $1.41, which was precisely where it had been a month before, although in the interim the rate has been oscillating between $1.40 and $1.42.

EURO STRENGTH CONTINUES AS ECONOMIC DATA IMPROVES

The Eurozone has also seen high inflation, which has risen to its highest level in two years. Improving economic circumstances and an easing of Covid-19 related restrictions have seen consumption – and prices – pick up across the bloc. Surging energy prices have also added to levels of inflation. Nevertheless, the European Central Bank (ECB) didn’t see any reason to change monetary policy, and stimulus measures continue apace.

Despite strong economic data, the ECB remained cautious and struck a dovish tone towards the end of the month. Making reference to rising inflation, ECB policymaker Pablo Hernandez de Cos said, “[the] ongoing rise in Euro area inflation is transitory.” His comments dampened demand for the single currency as the outlook for the bloc’s economy remains largely uncertain. However, with soaring economic sentiment and a pickup in the EU’s vaccination programme, we could see the Euro perform more strongly during the second part of June.

The GBP/EUR exchange rate was trading at a rate of €1.17 on 11 June, which is only slightly up on the rate of €1.16 seen a month earlier.

RISK-SENSITIVE AUSTRALIAN DOLLAR SINKS AS CHINA MAKES THREATENING NOISES

The Australian Dollar found itself in a position of weakness in May and early June, falling sharply against the Pound despite global risk-sentiment improving. The main driver for this was increasingly bellicose sounding threats from China over Australia’s military strategies in the Asia Pacific region.

The economic data had been broadly promising, with Australian unemployment falling to 5.5 percent despite a loss of 30,600 positions in April. Meanwhile, the Reserve Bank of Australia (RBA) left monetary policy unchanged, but economic forecasts for the nation are expected to be upgraded, it said. Bolstering this prospect, Australia’s latest economic data pointed to a marked improvement in the economy, with the latest Commonwealth Bank Manufacturing PMI beating forecasts and rising to 59.9.

However, clouds remain with the continuation of tensions between Australia and China. Beijing suspended a key economic dialogue with Australia, sparking concerns that souring relations between the two nations could weaken the latter’s economic recovery in 2021. Falling iron ore prices further dented confidence in the Aussie,

Over the last month, the Pound has gained several cents against Australian Dollar, rising from AU$1.80 to hit a rate of AU$1.83 on 11 June.

WHAT TO LOOK OUT FOR IN THE COMING WEEKS

In the UK, focus is mainly concentrated on the probability that restraints will remain on the full reopening of the economy after 21 June. This was the date that Boris Johnson had said restrictions would be lifted, calling it “Freedom Day”. However, some of his scientific advisors have been urging him to set back this date by a number of weeks in the face of the latest virus variant spreading across the country. Naturally, this will hit various economic sectors, and could dent consumer confidence.

Nevertheless, the swift pace of the UK vaccine rollout has kept Sterling buoyant for the past few months, and if it continues apace we could still see GBP hold onto its strength. Another thing to keep an eye on is UK inflation, and whether it will match levels seen in the US and EU as economic activity picks up steam. If the BoE looks likely to taper its bond buying schemes, this would likely give the Pound a boost as investors contemplate higher interest rates. All of this could be supported by a continuation in good economic figures coming through.

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