The pound’s performance in the week ahead will be determined by yesterday's news that Covid restrictions will not be relaxed further until 19th of July. On Tuesday, Wednesday and Friday, investors will focus on the releases of a series of market data, including employment data, inflation figures and UK retails sales numbers, respectively. With investors being interested to see how well the UK economy is recovering, and how the Bank of England will eventually respond by raising interest rates, any sign of strong data will be pound positive.

Covid restrictions

On Monday, markets reacted to the news that the UK government will not fully relax Covid restrictions on 21st June as planned due to the rise of Covid-19 infections over the past week. British Prime Minister Boris Johnson may also announce further government support for businesses, as junior health minister Edward Argar said on Monday.

Foreign exchange markets had already priced in a possible delay, so the news has not provided any immediate volatility. 

However, if the Indian variant of the coronavirus pushes infections and hospitalisations up and the vaccines do not prevent a rise in cases . hospitalisations and deaths, then the pound may be vulnerable to volatility down the line. Foreign Secretary Dominic Raab had said on Sunday that the government’s decision on ending Covid restrictions on 21st of June would depend on whether there was no link whatsoever between infections and hospital admissions - so the change suggests that this is the case.

Economic Data

The coming week will also see a number of important economic data releases, which if they come out strong, then this could prompt the BoE's Monetary Policy Committee to start thinking of terminating its quantitative easing programme before raising interest rates in 2022. This scenario will support the pound.

  • Employment data

On Tuesday, with the release of employment data, investors will be looking to see whether 50K jobs in the three months to April have been added to the economy. The unemployment rate is forecast to come in at 4.7%, down from 4.8% previously. If numbers are better, then the pound will find further support, while any move lower could impact on the pound in the near-term.

  • Inflation numbers

On Wednesday, May inflation numbers are expected to show an increase of 1.8% year-on-year, up from 1.5% previously.  This is almost the mid-point of the Bank’s 1%-3% target range. This will be positive for the pound.

UK retail sales

On Friday, UK retail sales figures could be up, with a reading of 36.8% growth year-on-year in May, which could boost consumer confidence.

The data predictions are generally optimistic and any digression from the numbers could hurt the pound and disappoint the markets.

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The British pound has come under pressure as there are concerns that the UK’s exit from the lockdown will be delayed. With Covid-19 cases on the rise, the government might postpone the final unlocking due on 21st of June. As Health Secretary Matt Hancock said, the government is "absolutely open" to delaying its plans to ease the restrictions, with a possible two-week delay until the 5th of July. This means that any possible delays will affect confidence in the UK economic rebound, and, consequently, hurt the pound which has had a solid performance throughout 2021.

Lockdown Easing, Indian variant and pound performance

Covid restrictions easing could be disrupted as scientists believe that the Indian variant (known as the Delta variant and B.1.617.2) could spread almost 50% faster than the previous strain in the UK, known as the Kent variant. While the Indian variant might be the cause for potential delays, many analysts believe that this is not enough reason for investors and traders to become especially concerned about the pound’s outlook, as the backdrop remains positive. As economists at ING Bank said, "a 'June pause' probably won't significantly derail the UK's recovery,” unless market confidence “goes into reverse.”

This will also be influenced by how strong business and consumer confidence will be as they will determine whether there will be the necessary funds and investment to drive economic growth. Economic data has up till now been positive with increased bookings in restaurants and pubs, as activity picks up. Economists believe that economic growth data for the second quarter of 2021 will be stronger than many have anticipated, and this will offer further support to Sterling. The potential for the UK economy to beat expectations could also increase confidence and possibly drive the Bank of England (BoE) to raise interest rates sooner than expected.

For the pound but also for other currencies, positive news that central banks will exit their pandemic support programmes will offer extra support. Already, we have seen that for those central banks which have reduced their quantitative easing programme and signalled that interest rates will rise, have seen their currencies outperform.

In general, the majority of analysts believes that the pound will benefit as the economy improves in the coming weeks and months, driven mostly by consumer savings during the various lockdowns. However, a rising number in Covid cases and further restrictions could dampen sentiment.

Short-lived pound weakness

For many economists and research analysts, a potential delay in the easing of restrictions will be damaging, but for others, such weakness will only be short-lived. It is believed the pound will be sold briefly by traders, but then renewed interest will resume.

While the pandemic will continue to affect the economy and the pound, other factors such as economic performance, vaccines, and rising UK real yields will also have an impact on the pound’s performance.

Are you transferring funds abroad?

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.