Monex: GBP on the rise thanks to the success of the UK vaccination program
Monex: GBP on the rise thanks to the success of the UK vaccination program
This is a commentary by Ima Sammani, FX Market Analyst, on the USD, EUR and GBP exchange rates.
GBP
Sterling rose 0.6% over the course of the last week as investors became mildly more bullish on sterling. Vaccination data was supportive of the improvement in appetite towards GBP, with this dynamic being most visible in GBPEUR. Even though sterling-euro traded in a tight range over the course of the week, the cross hit its highest level since May 2020 on Thursday as divergences in the level of vaccinations prompted the pound to continue making inroads against the single currency. Over the weekend, the British government quietly extended coronavirus lockdown laws to give local councils in England the power to close the service sector until July 17th - a sign that tiered measures are going to remain in place until at least summer to some degree.
EUR
Despite market sentiment being supported in today’s session, the euro is struggling to make any substantive progress against the dollar and continues to take on water against the pound. Tightened lockdown conditions are what is weighing on the single currency as Journal du Dimanche wrote a piece over the weekend stating that France could enter a third national lockdown on Wednesday night, citing unidentified sources. While France’s cases recently dipped, the tighter measures are expected due to the latest wave being driven by a more transmissible strain from the UK. The piece in JDD eluded to the lockdown being at least three weeks and comes at a time when other European nations such as Norway and Sweden are also tightening measures. This week, the focus of the euro will be on the state of play with lockdown measures, along with the response by officials to the sluggish rollout of vaccines. On top of that, economic data from the continent for Q4 is expected to show most of Europe heading for a double-dip recession. Expectations show France and Spain’s GDP figures coming in negative on Friday, with Germany’s GDP data expected to sit flat.
USD
Dollar dynamics continued to determine FX market pricing in general last week, and the theme isn’t set to end this week either. With most central banks out of the way last week, the focus shifts towards the Federal Reserve on Wednesday evening at a time where QE tapering is on everyone's lips. Comments from some regional Fed presidents stoked speculation that the Fed could taper its asset purchase programme towards the end of the year, much earlier than expectations of 2022. However, Chair Powell will be more than aware of the damage signalling such a move so early on in the recovery will cause, especially given how much uncertainty remains in the current economic outlook. For this reason, we don’t expect the Fed meeting to hold many fireworks as Powell throws cold water over expectations of monetary normalisation, but a communication error could result in a “taper tantrum” in markets similar to that exhibited in 2013. Beyond that, markets will keep a very close eye on the tone of bipartisan talks in Washington as the Biden administration has two weeks to strike an additional Covid relief package before the focus of the Senate shifts to Trump’s impeachment trial. On Sunday, Brian Deese, director of the National Economic Council in the White House, met 16 senators including eight Republicans to begin talks on the $1.9trn proposal. While many aren’t expecting the headline package to pass both houses, the question that markets will be battling with is how much will ultimately get through and whether it will occur before or after Trump’s impeachment trial.