Ellie Allen

Pound Strengthens Despite Fears Over Indian Covid-19 Variant


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The Pound struggled at the beginning of May after Boris Johnson admitted he was ‘anxious’ about the Indian variant of Covid-19. Johnson said that he would be ‘ruling nothing out’ to tackle the spread of the new variant, sparking off fears that the government’s roadmap for further easing lockdown measures in June could suffer a delay. This dampened confidence in the economic recovery which had been growing on hopes that June’s more extensive lifting of lockdown measures would provide a much-needed boost.

May also saw the government implement the third step of the lockdown easing roadmap. The PM said that the “roadmap remains on track” and added that the nation would continue “unlocking, cautiously but irreversibly.” Both the GBP/EUR and GBP/USD exchange rates benefited as a result of easing restrictions, with confidence in the UK’s economic recovery buoying demand for Sterling. However, lingering fears over the Indian coronavirus variant darkened what should have been a more optimistic week, limiting some of the Pound’s gains.

There was some upbeat economic news to aid the Pound, with the latest UK manufacturing PMI for April beating forecasts, rising from 60.7 to 60.9. Duncan Brock, the group director at the Chartered Institute of Procurement & Supply, explained the result, saying: “The manufacturing sector was flooded with optimism in April as the PMI rose to its highest level since July 1994, bolstered by strong levels of new orders and the end of lockdown restrictions opened the gates to business.”

POUND: BANK OF ENGLAND PREDICTS UK GDP WILL RETURN TO PRE-COVID LEVELS

The Bank of England (BoE) continued to hold 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 (MPC) central forecast that UK GDP would “recovers strongly over 2021 to pre-Covid levels” as lockdown restrictions are loosened and “growth is boosted by a decline in health risks and a fall in uncertainty.”

The latest Q1 GDP data fell by -1.5 percent quarter-on-quarter due to the UK’s stringent lockdown restrictions for the first three months of the year. Later in May saw the release of the latest ILO unemployment rate data for March, which fell below forecasts at 4.8 percent, sparking confidence the UK labour market is on the right track for recovery. May’s preliminary manufacturing and services PMI also performed strongly, bolstering the BoE’s bullish predictions for 2021. Despite this, Sterling’s strength taped off at the end of May as Covid-19 infection rates continued to climb modestly, causing concerns that June’s so-called ‘freedom day’ could pushed back.

US DOLLAR: SOARING INFLATION RAISES PROSPECT OF FED RATE HIKE

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 breached the Federal Reserve’s target of 2 percent, raising fears that it could raise interest rates. Nevertheless, the Fed maintained its stance that elevated rates of inflation was were merely a transitory phenomenon.

Fed Vice Chair Richard Clarida admitted he was surprised by the elevated rate, but added: “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.”

Despite growing confidence in the US economy, the opening-up of key economies in the Eurozone weakened demand for the safe-haven US Dollar last month. US manufacturing continued to accelerate as domestic demand and backlogs of uncompleted work sped up factory activity. However, US consumers appeared to be less confident about the economic outlook according to the US Present Situation Index, with short-term optimism retreating, but growing confidence in there being a robust return to growth in the second quarter.

Overall, the US Dollar put in a mixed performance last month, as improving risk-sentiment limited demand for the safe-haven currency and cautious optimism about economic growth. USD investors did remain cautious about the US unemployment crisis, however, with job recovery being much slower than hoped, despite President Joe Biden’s substantial stimulus measures.

EURO: STRONGER EUROZONE DATA FAILS TO BOLSTER SHARED CURRENCY

The Euro fell back slightly against the Pound throughout May despite the outlook for the Eurozone’s economy steadily improving as a number of key economies – including Germany and France – cautiously eased lockdown measures. May saw the release of Germany’s latest retail sales data for March, which soared by a better-than-expected 11 percent, while the Eurozone PMI data for March remained strong, buoying confidence in the bloc’s economic recovery.

German economic sentiment gauge for May also beat forecasts, rising from 70.7 to 84.4, while investor sentiment soared to its highest level since 2000. ZEW President Professor Achim Wambach commented on the statistic, saying: “The slowing down of the third Covid-19 wave has made financial market experts even more optimistic. The assessment of the economic situation has also improved noticeably. The experts expect a significant economic upswing in the coming six months.” However, concerns over the potential economic damage caused by the Indian Covid-19 variant limited confidence in the Eurozone economy, preventing the single currency from making any strong gains against the Pound or the US Dollar.

Despite strong economic data, the European Central Bank (EBC) 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 that the “ongoing rise in euro area inflation is transitory.” His comments served to limit the appeal of the single currency as the outlook for the bloc’s economy still remains largely uncertain. However, with soaring economic sentiment and a pickup in Europe’s vaccination programmes, we could see the Euro perform more strongly in June.

AUSTRALIAN DOLLAR HAMMERED AS CHINA WOES CONTINUE

The Australian Dollar found itself on the ropes in May, falling 6 cents 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 data was 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.

WHAT TO LOOK OUT FOR IN JUNE

Pound traders will continue to monitor UK economic data in June. Early in the month we will see the release of the UK manufacturing PMI, which is expected to put in a strong performance. Also, any bullish comments from the Bank of England’s Governor Andrew Bailey would also be Pound-positive. Meanwhile, UK employment figures will likely continue to influence economic sentiment, so any signs of falling joblessness would also likely help to strengthen the GBP exchange rate.

However, if concerns over the Indian variant of coronavirus continue to intensify, then we are likely to see Sterling suffer. Any more indications that the government could delay further relaxations of lockdown measures on June 21 would no doubt limit confidence in the UK’s economic recovery and limit the upside potential for the Pound.

Of additional note, the latest G7 summit is due to be held in the UK’s Cornwall in early June and there is the potential for the PM to unveil new economic measures as he addresses world leaders. If there are any surprises in store we could see them have an impact of Sterling, especially if they relate to inward investment in the UK.

Euro traders will continue to monitor the performance of the German economy, which is the largest in the Eurozone. If retail sales continue to rise alongside the latest PMI data for May, then the single currency could continue its upward trajectory. The Eurozone’s final GDP data for the first quarter will also give a good indication of the direction for the bloc’s economy for 2021.

In the US, the Federal Reserve will remain the centre of attention in June. If the Fed maintains that soaring inflationary pressure is ‘transitory’, then the Greenback could continue to suffer. Added to this, if global risk sentiment continues to improve, then demand for the safe-haven currency would likely continue to drop off, weakening the US Dollar as a result. However, the Federal Reserve’s interest rate decision and subsequent monetary policy report will be the key driver for the USD/GBP exchange rate in June.

Improving risk sentiment in June could also provide a strong boost for the risk-sensitive Australian Dollar. However, if Covid-19 cases continue to rise in the UK – or Australia -and Chinese trade tensions intensify – then the ‘Aussie’ could quickly be compromised. Meanwhile Australia’s retail sales data and unemployment rate report, could also provide some direction for the AUD/GBP exchange rate. Again, if the nation appears to be on the road to recovery from the effects of the pandemic, then the Australian Dollar would likely head higher against the Pound.

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