Sterling Exchange Rates Stuck In A Rut
Updated: May 10
The pound has found itself stuck in a rut in recent times and the UK currency has found it difficult to recapture the form of previous months.
The pound has dropped 3 cents since the 12-month high of +1.18 several weeks ago although one could argue 1.1800 was only breached due to a lack of liquidity in the market on Bank Holiday Monday. An increased number of analysts are now suggesting the UK currency has ridden the highs of the successful vaccination programme and that other countries are beginning to catch up.
Analysts at Nordic Bank SEB say the UK’s successful vaccination programme is already priced into the currency and that the Eurozone is likely to next deliver good news. UK coronavirus infections and death numbers have dropped significantly but the UK Government appears intent on sticking to the lockdown dates despite saying it would be data rather than date driven. Calls from Conservative backbenchers to ease the lockdown restrictions continue to fall on deaf ears and hopes of a strong early economic bounce are delayed.
Other analysts that believe the pound has priced in most of the good news are those at HSBC. Daragh Maher, Head of Research at HSBC (US) said “we believe a lot of this good news is now priced in the currency,” as he talks about the UK’s vaccination programme and robust start to the year. HSBC also said the economic growth that the UK has seen and will likely continue to see will put pressure on the Bank of England and they now expect the bank to taper rather add quantitative easing at the next Monetary Policy Committee meeting.
However, analysts at Morgan Stanley point towards next week’s local elections in Scotland as the key reason for the lower rate, where the SNP may increase its number of seats and increase Nicola Sturgeon’s demands for “Indyref 2,” ratcheting up pressure on Boris Johnson to grant a second independence referendum. Fear of a pro-independence majority would be a threat to the union although Morgan Stanley said “we don’t expect large moves in GBP following the Scottish May 6th election. As the market has priced a lot of optimism around the BoE rate path and the UK vaccination programme”. If the SNP wins many seats, Morgan Stanley believe the pound will weaken on the day, but the impact will be temporary.
Euro exchange rates supported by growing economic confidence
Yesterday’s Eurozone Sentiment Index rose from 100.9 to 110.3 in April, suggesting confidence within the Eurozone is improving and painting a brighter picture for the recovery. Confidence is now at its highest level since 2018 as concern over the economy lessens. The service sector has also shown signs of returning to a positive, increasing hope of a better GDP performance in Q2.
However, despite the positive data, the EU’s key risk watchdog, which is chaired by Christine Lagarde, president of the European Central Bank, has said businesses may struggle to stay afloat, the longer they relied on financial support. Debt would rise and eventually reach a tipping point, sending many firms into bankruptcy.
The ESRB (European Systemic Risk Board) cited predictions from Allianz and Euler Hermes forecasting a 32 percent rise in insolvencies and an even larger rise of 34 percent in Eastern Europe as financial support measures are paired back. Bank of America has said that more than 200,000 businesses across France, Germany, Spain, and Italy will come under threat when support is withdrawn. The ESRB has said the spike in business failures could cripple the region’s banks as they see a sharp rise in loan defaults and the extent of damage could threaten the European project itself. Increased insolvencies could threaten the ability of individual states to recover from the pandemic, which in turn will create political and economic instability that could then spill over into the rest of Europe.
Meanwhile in France, Emmanuel Macron has announced a phased lockdown exit that would see British and foreign tourists (with a health pass) be able to visit France from the 9 June. However, medics have warned the plans are way too ambitious given the current infection numbers. France will begin to ease lockdown measures from Monday with restaurant terraces reopening mid-May and a return to almost normal by 30 June. The lifting of lockdown measures is divided into 4 phases and will see France follow the UK by just 9 days despite a significantly higher number of infections and coronavirus related deaths. The health pass will either be proof of vaccination or a negative PCR test before travel.
US Dollar strengthens post GDP data release
Data released yesterday showed that GDP grew at an annualised rate of 6.4 percent during the first quarter of the year. The GDP data was strong and further supported by solid consumer spending growth and an increase in fixed investment spending. US GDP fell by more than 10 percent between Q4 2019 and Q2 2020 but is now only 0.9 percent lower than pre-pandemic levels.
The GDP figure was largely driven by consumer spending where purchases of durable and non-durable goods rose by 41.4 percent and 14.4 percent respectively. Although, fixed investment spending increased by a solid 10.1% annualised. Business spending on equipment increased by 16.7 percent and spending on intellectual property increased by 10.1 percent. Strong growth here can be partly attributed to supporting employees work from home. All of this happened whilst exports of goods and services declined by 1.1 percent.
Wells Fargo said “We expect that real GDP growth will remain robust due, in large part, to pent-up demand for many services and the mountain of excess savings that many households have accumulated. Indeed, 2021 likely will be the strongest year for US real GDP growth in nearly 40 years”.
There are still problems in the US, the number of people filing for unemployment benefit is still exceptionally high with 553,000 people filing for benefits last week although this number has been falling sharply. Also, the jobs market is still 8.4 million below pre-pandemic levels, but the rapid rollout of vaccines, the reopening of businesses and the Biden government’s $1.9 trillion stimulus package has boosted confidence and supported a remarkable recovery. More than 90 million Americans received cheques from the Biden administration and consumer spending now accounts for more than 65 percent of US economic activity.