Ellie Allen

The Pound In 2020: A Year of Shocks and Surprises


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Nobody can say that 2020 hasn’t been an eventful year – in fact it’s been a year of surprises and shocks, and it’s not even over yet. For the Pound, it’s been the year in which it battled to keep the upper hand following a catalogue of bad news. We’ve had everything from Covid-19 lockdowns, a political shock when the Prime Minister entered intensive care, economic chaos and job losses, an American presidential election … and all of it set against a backdrop of the countdown to the UK leaving the EU’s Brexit transition period at the end of this month. Below we’ve summarised each month, as it happened.

MONTH BY MONTH

January. The Pound got off to a solid start in 2020 as there was relief that the uncertainty surrounding Brexit seemed to be drawing to a close. The UK had finally entered a transition period for leaving the EU – the end was in sight, even if no deal had been agreed yet. Traders wondered whether the Bank of England (BoE) would cut interest rates at the end of January. In the event the Bank decided to keep them steady at 0.75 percent as policymakers foresaw no signs of any upcoming turbulence, and this gave Sterling a bit of a boost against other currencies.

Elsewhere, currency markets were keeping an eye on the outbreak of a new type of flu virus centred on China, with concern over the likely effects it might have on global trade and economic growth in the region.

Average GBP/USD $1.3076
Average GBP/EUR €1.1772

February. The Pound spent much of the month of February steady on currency markets even though some traders were starting to seek out safe harbours in reaction to the coronavirus scare centred on China. This stability, however, came to a sudden end when the BoE hinted UK interest rates may need to be cut further, causing the Pound to slide.

It had only been a month since the BoE had opted to keep interest rates steady at 0.75% at the end of January, so talk about cutting them to help struggling businesses caused a sense of unease among Pound investors.

Average GBP/USD $1.2980
Average GBP/EUR €1.1888

March. The Covid-19 virus scare in China had by now spread to other countries and was declared a pandemic by the World Health Organisation. This drove a risk-off movement in Forex markets, and over the course of March the Pound weakened against its main rivals, sinking dramatically lower against the US Dollar, and to a lesser extent against the Euro. In fact, the Pound hit a 35-year low against the Dollar, slumping to $1.14. The UK went into a period of lockdown, with only essential businesses remaining open.

It wasn’t all been bad news for Sterling though, and there was a pronounced strengthening against risk-sensitive currencies such as the Australian Dollar.

Coinciding with the UK budget, there came the expected interest rate cut by the Bank of England, which lowered rates to a record low of 0.1 percent. At the same time, America’s Federal Reserve enacted an emergency rate cut.

Average GBP/USD $1.2375
Average GBP/EUR €1.1179

April: In April the Pound struggled against its rivals despite a weakening US Dollar. One of the main reasons for this was the uncertainty surrounding the health of UK Prime Minister Boris Johnson, who was admitted into intensive care after contracting Covid-19. This, and the ongoing economic damage caused by the nationwide lockdown saw markets remaining generally wary of the Pound, with even risk-sensitive currencies such as the Australian Dollar outperforming it.

Unlike in March, there were no big shocks for Sterling in April. The BoE kept rates steady at their record low of 0.1 percent, while at the same time, to reassure markets, the US Federal Reserve further pledged a massive $2.3tn in loans to cushion the blow to businesses of the economic turmoil caused by Covid-19.

Average GBP/USD $1.2407
Average GBP/EUR €1.1413

May. The Pound weakened further against many of its rivals in May as interest remained fixated despite the easing of lockdown restrictions. However, the focus had by now shifted to how governments around the world would restart their stalled economies. Economists predicted a best-case scenario of a V-shaped recovery, although fears of a second wave of the virus hitting later in the year remained a concern. Sterling’s sensitivity to global trade made it susceptible to the ongoing broad-based weakness in the world economy.

The Pound also had to contend with a record drop in UK GDP growth, as figures revealed a 5.8 percent contraction in March compared to the previous month. Despite all this, the Pound managed a brief rally at the end of the month on Brexit breakthrough hopes.

Average GBP/USD $1.2302
Average GBP/EUR €1.1265

June. The Pound came under more pressure in June, slipping further against virtually all major currencies. The main reason behind this weakness was put down to the state of the Brexit negotiations between the UK and the EU. Boris Johnson said he was optimistic that a deal could be secured, but currency traders were not so sure, and the market became biased towards a no-deal scenario. Against this backdrop, it was hard for the Pound to fight back against its recent losing streak.

Another reason for the Pound’s poor performance in June was the continued drip-feed of poor economic news. The headlines were filled with reports of jobs losses across the UK economy, with the retail and aviation sectors being particularly badly affected as thousands of redundancies and several major insolvencies were announced.

Average GBP/USD $1.2512
Average GBP/EUR €1.1121

July. Compared to June, July was almost a mirror image performance for the Pound. Sterling held its ground against the Euro and positively rocketed against the US Dollar at the end of the month, posting a gain of almost 5 percent. There were several reasons for this surge in strength, but for the most part it boiled down to the US Dollar weakening.

Sterling’s better-than-expected performance could seem strange at first glance as the UK economic figures were generally underwhelming and the news headlines filled with gloomy talk about further lockdowns and a potential second wave of Covid-19 later in the year. Nevertheless, investors came around to the notion that the Pound was undervalued compared to its rivals, and with the US Dollar weakening so much – due to a triple whammy of bad economic news, an upsurge in domestic Covid-19 cases, and President Trump seeming to suggest the November elections could be postponed or cancelled – the Pound naturally benefitted.

Average GBP/USD $1.2643
Average GBP/EUR €1.1052

August. The Pound continued to make a comeback in August, remaining above the $1.30 level despite some shaky economic figures and news that the UK economy had been hard hit by lockdown measures. One reason it was able to march higher was the US Dollar falling back further on markets as it continued on a weakening path. The Pound even put in some gains against a strengthening Euro, although it did slip back against the Australian Dollar.

It was perhaps surprising that the Pound held onto its recent strength as, at first glance, there didn’t seem to be anything offering support aside from some buoyant retail sales figures. Yet news that the UK economy had been harder hit than any other major economy by the Covid-19 restrictions on businesses and travel was shrugged off by markets. BoE chief Andrew Bailey was upbeat about the prospects for the economy, saying that quantitative easing would be longer lasting and more extensive than previously indicated, adding, “We are not out of firepower.”

Average GBP/USD $1.3129
Average GBP/EUR €1.1103

September. This was a generally poor month for the UK currency, with notable losses sustained. The first half of September was the more difficult as Sterling found itself subdued by gloomy speculative Brexit headlines. The losses were greatest against the US Dollar, with Sterling losing almost 4.5 percent, although losses against the Euro were not as severe. The Pound also slipped against the Australian Dollar as risk appetite dried up, although it managed to claw back most of its earlier losses towards the end of the month.

The UK economic recovery was already looking unsteady before Prime Minister Boris Johnson unveiled a new system of region-specific tiered lockdowns to slow the spread of Covid-19. The announcement heaped further pressure on an economy struggling to re-emerge and limited the prospects for the Pound breaking higher.

Average GBP/USD $1.2962
Average GBP/EUR €1.0991

October. The Pound fluctuated quite widely in October, although on the whole it ended up stronger against the other major currencies. Early on there was a patch of weakness related to Brexit woes, with losses against the US Dollar. There were also losses against the Euro, but all this turned around in late October when a sudden surge in optimism about a possible Brexit trade deal gave Sterling a lift. Many of the Pound’s earlier losses were won back, although traders remained cautious ahead of the upcoming US presidential election.

UK Chancellor Rishi Sunak announced a new – less generous – system of wage support for furloughed workers over the winter months. Called the Job Retention Scheme, the government agreed to pay up to half of the wage bill for workers who have been hit by Covid-19 related business shutdowns.

Average GBP/USD $1.2976
Average GBP/EUR €1.1026

November. Throughout November the Pound strengthened on currency markets due to a trio of factors. These consisted of rising global risk appetite in the wake of the US election – which Democratic Party challenger Joe Biden was deemed to have won – a number of breakthroughs in the race to find a vaccine for Covid-19, and rising expectations that a Brexit deal would be agreed upon before the transition period runs out. Furthermore, the Pound was swept up in a move away from the US Dollar, which had now experienced three quarters of weakening and was approaching a two-year low, and benefitted in particular from the Oxford University/AstraZeneca vaccine breakthrough.

There was less welcome news when it was announced that Sir Philip Green’s Arcadia retail empire was on the verge of bankruptcy. The High Street chain included popular brands such as Burton, Dorothy Perkins and Laura Ashley, and some 13,000 jobs would be at risk if it went under. These job losses would be added to the predicted 2.6 million people unemployed by mid-2021, according to the Resolution Foundation.

Average GBP/USD $1.3202
Average GBP/EUR €1.1153

December. As we move towards the end of the year, the Pound remains on a strong footing, and could go higher if a robust Brexit agreement is reached. In fact, on 8 December, the Pound received a boost when it was announced by Boris Johnson that a major impasse had been overcome as the UK and EU agreed to resolve an outstanding issue relating to the Irish border. The move was regarded as a key step to securing a Brexit agreement and the Pound immediately rose a cent against the Dollar.

For the remainder of the year, it will undoubtedly be Brexit that drives the value of the Pound, with the UK set to end its transition from the EU at 11pm on 31 December.

Average GBP/USD $1.3404
Average GBP/EUR €1.1096

PROTECT YOUR CURRENCY TRANSACTIONS FROM VOLATILITY IN 2021 AND BEYOND

That wraps up our summary of 2020 for the Pound. While it has been an eventful year for the Pound, we have no guarantee that 2021 won’t be full of similar surprises. If you rely on stable exchange rates, either for your business, or perhaps if you have a major purchase planned, there are steps you can take which will reduce your level of risk, and Currency Solutions is on hand to advise you how.

If you’d like to protect your currency transactions from swings in exchange rates, or if you’d simply like to get a great deal on your currency transactions, get in touch with us today and we’ll tell you how we can help.

Final thoughts

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