- Bluestone Currency
Could we see further gains for Sterling?
Since the beginning of the year there has been two main catalysts for sterling's advances; Boris Johnson's ability to secure a Brexit deal and the UK's rapid vaccine rollout.
Although Boris Johnson’s deal was no great shakes, a no deal scenario has been avoided and this was a sterling investors worst fear. This now clears the path for the pound to make significant gains with the uncertainty surrounding Brexit now behind us. Breaking the 1.15 resistance point on GBP/EUR demonstrates this. 1.15 having held up for nearly 18 months while Teresa May was in negotiations.
The vaccine rollout in the UK has been particularly impressive, with the UK expected to offer every adult their first shot by 31st July. With many restrictions ending today this will also bode well for the economy and in turn the pound.
Sterling has had an impressive week last week, making gains against the majority of major currencies. The primary reason for these gains could be the Scottish election results. Nicola Sturgeon failed to win a majority which means the probability of a Scottish referendum now seems less likely. If Scotland were to leave this would clearly have a sizeable impact on UK GDP. In the build up to the 2014 Scottish referendum we did see a significant fall in GBP value.
UK economic data in the spotlight last week
There was further positivity surrounding the UK economy last week with several data releases landing above expectations. Manufacturing production was expected to fall from 1.5% to 1%, but landed at 2.1%. Industrial Production was due to land at 1%, but came in at 1.8%. And perhaps the most significant GDP was expected to be 1.4% and landed at 2.1%.
For a long period of time during Brexit talks data releases did not seem to have the impact they once did, with politics proving to be the key driver from sterling. It seems now their influence is returning.
Those who are purchasing sterling and are hoping for a considerable drop in the pound’s value back to pre-Brexit levels could still have a chance. Despite a spike in the Indian Covid variant in the north of England, the government are still going ahead with their plans to further ease the lockdown today where we see the opening of the hospitality industry as well as being able to eat indoors. If the government are not able to control the spread of this new variant, history could yet again repeat itself which could then again lead to sterling weakness.
Positive news from ZEW economic survey
Despite the euro losing value against the pound it has made gains against other currencies and there is a slight air of optimism. Zentrum für Europäische Wirtschaftsforschung (ZEW), is an economic research institute based in Mannheim. ZEW recently released their survey regarding economic sentiment for May with the data beating forecasts and rising to 84.4.
The euro benefited from growing confidence in the bloc’s largest economy. Germany is considered the engine room of the Eurozone and Germany’s economic situation has significantly improved over the last few months, boosting the outlook for the bloc’s economy as a whole.
ZEW President, Professor Achim Wambach said the following regarding the data: ‘The braking of the third wave of Covid-19 has made financial market experts even more optimistic. In the May survey, ZEW economic expectations reach their highest level in more than 20 years.
‘The assessment of the economic situation is also improving noticeably. The experts expect a significant economic upturn in the next six months. The economic outlook for the euro area and for the United States is also improving considerably.’
Last Monday we also saw the release of the Eurozone’s economic sentiment gauge for May, which also landed above predictions and rose to 84.
Nevertheless, some euro investors are remaining cautious as the delay in Covid-19 vaccination rollouts across Europe could weigh on the Eurozone’s economic growth this year. There is also the added fear that the vaccine rollout could stall as it is rumoured that many Europeans are reluctant to take the AstraZeneca vaccine following rumours it could cause blood clots.
There is some data of consequence being released this week for the Eurozone. The next key data release will be GDP, tomorrow. There is expected to be little movement from last month with figures set to remain at -0.6% the same as March.
On Wednesday we have the European Financial Stability Report which does have the potential to cause volatility and later in the day we also have Consumer Price Index (CPI) data. CPI data measures the change in price on goods and services. There is expected to be a rise from 1.6 to 1.7, however if the data arrives away from expectations expect market movement. ZEW recently released their survey regarding economic sentiment for May with the data beating forecasts and rising to 84.4.
$10 Trillion expected to be spent on economic recovery
Although the US is now witnessing an impressive vaccine campaign, the economic damage caused by the pandemic to one of the world’s largest economies has been sizeable.
Biden, has pledged to do whatever it takes to get the US back on track, but this could come at expense of the US dollar. There is expected to be as much as $10 trillion pumped into the US economy adding to the Country’s monumental debt, which currently sits at a whopping $28 trillion.
Generally speaking if large sums of money are pumped into an economy to stimulate growth the currency in question weakens and considering the volume of fund being considered by the US this does not bode well for the value of the US dollar.
Another cause for concern is the status of the US dollar. The US dollar is often the destination of choice in time of economic uncertainty and is considered a safe haven currency. With the current economic situation in the States more investors are choosing to move their funds in other directions in fear of dollar weakness.
Wednesday saw CPI data released. As mentioned in the euro section Consumer Price Index data is a measure of the changes in price in goods and services and has been known to influence currency value. It arrived at an impressive 0.8% against an expected target of 0.2%. This did little however to stop sterling’s advances which tested 1.42 on GBP/USD.
Initial Jobless Claims will be released tomorrow and this is a key barometer as to the health of an economy and as such could influence dollar value. There is expected to be a fall from 498k to 490k. Retail Sales Data on Friday could prove particularly interesting as there is set to be a fall from 9.7% last month to 1%. Again, if figures land away from expectations expect volatility.