Ellie Allen

Pound Struggles But BoE Remains Upbeat About UK Economy


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The Pound struggled at the start of April, falling sharply against the US Dollar before recovering again later in the month. The reason for Sterling’s recovery against the Dollar can be put down to dwindling expectations of negative rates from the Bank of England, as well as positive sentiment from the continuing rollout of Covid-19 vaccines in the UK. Against the Euro, it was a case of surging demand for the shared currency against the US Dollar, boosting the EUR/USD pairing over 3 percent, to the detriment of GBP/EUR.

Covid-19 vaccinations reached a new milestone, with a quarter of UK adults now being fully vaccinated. As a result, this has continued to buoy optimism in the UK economy, which economists are saying will rebound with the further easing of lockdown measures in May and June. The Bank of England’s (BoE) Deputy Governor Ben Broadbent echoed this sentiment, saying the UK is now likely to see a ‘very rapid’ recovery, once restrictions are lifted.

The UK’s preliminary services PMI confirmed this outlook for the economy by beating forecasts and rising to an impressive 60.1. Chris Williamson, Chief Business Economist at IHS Markit, explained the statistic saying:, “Companies are reporting a surge in demand for both goods and services as the economy opens up from lockdowns and the encouraging vaccine roll-out.”

Despite this, unemployment continued to creep higher but there was growing confidence among the economic commentariat that businesses will begin to hire again soon, assuming there is enough labour. Many hospitality and transport firms have begun to report labour shortages, especially those that rely on workers from the EU. New rules since Brexit, combined with limited international mobility, have meant a shortage of workers in some key industries. In particular, EU based lorry drivers have failed to return to the UK in the numbers needed to keep the sector functioning smoothly.

BREXIT JITTERS OVER NORTHERN IRELAND BORDER DENTS FAITH IN STERLING

The Pound came under pressure in April as concern mounted over tensions in Northern Ireland, as well as the issue of the border with the Republic of Ireland. This, as well as a slowing vaccine drive, caused sentiment towards the UK currency to be dampened.

Later in the month, Sterling staged a recovery against the US Dollar but remained sensitive to global risk appetite and there was no comeback against the Euro. One of the main drivers of this risk appetite was a wave of Covid cases striking India. Versus the Euro, the Pound subsequently fell by around 2.5 percent, which was its worst losing streak in over a year.

There were further jitters when it became apparent that Scotland’s first minister, Nicola Sturgeon, could call another independence referendum if her party gains enough support to secure victory in elections later this week. Analysts predict the Pound could take a hit if her party wins, although it is by no means sure that any referendum would take place or that voters would opt to break up the UK.

US DOLLAR SLUMPS DESPITE ECONOMIC RECOVERY AND MASSIVE STIMULUS PACKAGES

The US Dollar found itself falling back in April as global risk sentiment improved, limiting the appeal of the safe-haven currency. In terms of US economic data, the outlook for the world’s largest economy continued to improve, with 900,000 jobs added in March and retail sales jumping by an impressive 9.8 percent.

The Federal Reserve was one of the reasons for the Dollar’s decline during April, with the central bank indicating that interest rates would remain lower for longer. This pledge boosted stocks on Wall Street, but had the opposite effect on USD, with the DXY Dollar Index slumping to two-month lows.

Meanwhile, US President Joe Biden promised another tranche of stimulus money for the economy, with the announcement on the eve of his 100 days in the job that a further $1.8 trillion would be earmarked for social projects. Biden went on to claim that much of this money would be raised by cracking down on wealthy individuals and corporations who use tax havens.

Despite the resulting slump in demand for USD on the wider market the Greenback maintained a rate of £0.72 to the Pound over the course of April, although it did fall to £0.71 mid-month.

EURO GETS A SPRING IN ITS STEP AS VACCINE ROLLOUT QUICKENS

The Euro strengthened on currency exchanges in April as the vaccine rollout picked up speed and signs of economic resilience across the Eurozone began to appear more pronounced. The European Commission now expects 70 percent of all EU adults to be vaccinated by the end of June. This helped shift the previously pessimistic mood towards the Euro, allowing it to appreciate strongly against the US Dollar, and to a lesser extend against the Pound.

Economic data also proved strong, with the Eurozone’s manufacturing PMI for March beating forecasts and coming in at 62.5. Chris Williamson from the economic survey company IHS Markit was optimistic about the outlook for the bloc’s manufacturing sector, saying:, “Production and order books [are] growing at rates unprecedented in nearly 24 years of PMI survey history.”

At the same time the flash Eurozone PMI composite figure for April rose from 53.2 to 54.7, providing a better picture for the bloc’s economic recovery. As a result of this better-than-expected economic news, the Euro strengthened further against the Pound in April, rising from £0.85 to £0.87.

AUSTRALIAN DOLLAR DRIFTS HIGHER AS COMMODITY PRICES SOAR

April saw the Australian Dollar strengthen as demand for it picked up. It gained 3 cents against Sterling as support from higher commodity prices helped bolster demand, with both iron ore and copper at decade-high levels.

The Reserve Bank of Australia (RBA) remained dovish and continued to indicate low levels of inflation in the Australian economy, as well as low levels of wage growth, dampening any expectation that interest rates could rise. At present, they are expected to remain on hold until 2023 at the earliest.

Adding to this sense of caution, the RBA published its semi-annual report on financial stability, which pointed to risks in the economy from people taking on excessive debt, as well as a glut of empty office space across the nation. Conversely, it saw rising property prices as a potential danger, with the risk of an asset bubble having a potential negative effect on the stability of the financial system.

Despite this dovish talk, a vulnerable Pound slipped three cents against the Aussie, falling from AU$1.82 to AU$1.79 by the end of April.

WHAT TO LOOK OUT FOR IN MAY

For the Pound, one of the key risk events will be the likelihood of there being a Scottish referendum on membership of the UK. Elections are taking place in Scotland on 6 May and its outcome could have a big effect on the Pound. If Nicola Sturgeon’s Scottish Nationalist Party secures victory, it’s likely that, with the help of some smaller parties, she could call another referendum. Sturgeon has been adamant about Scotland leaving the UK and re-joining the EU since Brexit, although analysts say it is a risky proposition for the Scottish economy and could have a big impact on the British Pound.

Across the pond, focus will remain on Treasury yields, where it has been of late. If the economy continues to exhibit strong growth, Treasury yields are likely to rise, meaning the Fed will come under pressure to similarly adjust interest rates. There is a Federal Reserve meeting in mid-May, so we will get to hear about the likely policy direction then. In addition, there will be increased attention on US inflation, with many consumers now starting to feel the pinch of higher prices. If inflation cannot be reined in, this could have an effect on growth, which would in turn force the Treasury and Joe Biden to increase stimulus measures, further weakening USD.

The Euro could continue on its recent upward trajectory if vaccination rates remain high and economies begin to open up again. With holidays and travel picking up pace, this could prove to be a catalyst for higher Eurozone growth. Talk of a so-called vaccine passport that would allow visitors to enter the EU from the rest of the world will be closely listened to by investors and assessed on the basis of its merits.

Finally, the Australian Dollar will likely be sensitive to any comments made by the RBA regarding inflation and unemployment rates. These two key indicators are what tend to drive policy decisions for the central bank, and although rates are set to remain on hold for another two years, any indication that this could change will likely swing the Aussie one way or the other. At the same time, any hint that the RBA’s quantitative easing program could be wound down would have the effect of boosting AUD. As ever, the Australian currency will remain bound to global risk appetite, as well as commodity prices. If prices of iron ore and copper remain high, this should keep a floor under AUD demand throughout May.

The Q2 2021 GBP/EUR bank averaged forecast is €1.14, while the forecast for GBP/USD is $1.36.

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