The Pound spent much of March strengthening against other currencies but suddenly fell back again at the start of April after Europe’s drug regulator indicated it had found a link between the AstraZeneca vaccine and blood clots. This led to the UK medical regulator changings its guidance on the drug, sparking worries that the issue might impact the reopening of the economy over the longer term.
Within days of the announcement, the Pound had slipped to a five-week low against the Euro, and a one-week low against the US Dollar, erasing many of the gains built up over March. Sterling had been doing so well until now, with the UK’s speedy vaccine rollout being the engine that had propelled it higher throughout 2021. Whether this is some kind of reversal or just a temporary setback remains to be seen, and we shall find out over the next few weeks.
At the start of March, chancellor Rishi Sunak’s budget laid out tax and spending plans for the next three years to help counter the effects of the Covid-19 inflicted damage to the UK economy. The Budget mostly focused on providing more money and grants for businesses, as well as extending the wage support scheme which has been in place since early 2020. There were tax rises, but not as many as expected and they were mostly aimed at the corporate sector and are not due to come into effect until 2023.
As March 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 the drug’s export. This disagreement generally did more harm to the Euro than the Pound at the time, and a rising wave of new Covid-19 cases across the EU put further pressure on the single currency.
On the last day of the month, figures revealed the UK economy had grown by more than anticipated at the end of 2020 – a 1.0 percent GDP growth rate had been forecast in Q4 but the 1.3 percent that was revealed caused some analysts to declare the economy now seemed to be on a firmer footing.
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 mighty Greenback began to live up to its reputation once again in March, breaking the long-term weakening trend we have seen over much of the past year. One of the main reasons for this was President Joe Biden’s colossal $1.9 trillion stimulus package, which passed through the House of Representatives and then the Senate. Eligible American citizens will each receive $1,400 and unemployment benefit will be extended, while there will also be a raft of funds disbursed to states to help them deal economically with the fallout from the Covid-19 crisis.
On top of this, Mr Biden announced a $2.3 trillion infrastructure spending plan, which would see a major upgrade of roads and bridges, a broadband rollout to rural area, massive spending on scientific research grants and much more besides. Specifically, the US president said he wanted to stop the US being ‘overtaken’ by China, stating:
“Over the next six to eight months, China and the rest of the world is racing ahead of us and the investments they have in the future. America is no longer leading the world because we're not investing.”
This infrastructure spending plan has not yet been ratified by Congress, but with so much newly minted money sloshing around economists are now worried that it will lead to higher inflation which in turn would force the Federal Reserve to raise interest rates. This explains why the Dollar has found some strength recently, but the big question is how long it can last.
By 8 April, the GBP/USD exchange rate was trading at $1.37, which is down a cent on what it was a month previously.
There was a reversal of fortune for the Euro at the end of March following a couple of months of weakness related to the slow rate of Covid-19 vaccination programmes across the EU. This occurred when it was revealed the EU was on-track to hit its vaccination targets earlier than expected, despite signs of a resurgence of virus cases across the bloc.
Economic data wasn’t very supportive of the Euro, with Eurozone GDP data from the fourth quarter underlining the challenge faced by the bloc, with a 0.7 percent contraction being revealed. What’s more, German retail sales slipped by a sizeable 8.7 percent at the beginning of 2021, adding to fears that consumers are failing to help pull the bloc out of recession.
It wasn’t all bad news in the Eurozone, however, as the latest HIS HIS Markit flash PMI survey – which gives a clear and immediate picture of what’s going on in the economy based on current order books – revealed nuts and bolts economic activity was on the rise, with German manufacturing in particular 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, which makes the surveys, 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.”
The GBP/EUR exchange rate was trading at €1.16 on 8 April which was a cent lower than it was a month ago, and two cents lower that before the AstraZeneca safety fears arose at the start of the week.
Sterling hit a high of AU$1.82 on 2 April but has been losing ground since then. The Australian Dollar had seen some of its recent strength ebb away in 2021 as investors continue to move funds into US Dollar denominated assets. A number of global risk factors drove the Aussie lower, including rising tensions between the US and China, an upsurge in Covid-19 cases in Europe, and the impact on global trade caused by a container ship getting stuck in the Suez Canal and blocking all traffic for a week. None of this helped the risk-sensitive Australian Dollar.
Over the last month, the Pound has slipped back against the Australian Dollar to hit a rate of AU$1.80 on 8 April.
The rest of April will see a pickup in pace of the gradual reopening of UK economic sectors, including the beleaguered hospitality branch next Monday when hotels, bars and restaurants reopen, albeit with outdoor dining. However, the main driving factor for Sterling will likely be dictated by the UK and EU medical safety agencies, and any rulings that are made regarding the safety of the AstraZeneca vaccine.
For the rest of April March focus is likely to remain on the so-called vaccine differential between the UK and the EU. This is the primary driver of the GBP/EUR exchange rate at the moment and the recent revelation that the EU’s vaccine drive is speeding up, while the UK’s is slowing down has the potential to cause further weakness for the Pound in the weeks ahead.
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