Sterling experienced some volatility after reaching a fresh three-year high against the US dollar due to expectations for an economic recovery and positive house price data. Some analysts have attributed the surge in the pound to positive global investor sentiment about the UK economic recovery, while others pinned the pound’s gains on a retreat in the US dollar.
US dollar weakness & BoE interest rates
According to strategists at Toronto-Dominion Bank, “The whole ‘U.K. vaccine’ story is a little tired.” It’s probably less about the U.K. and more about the USD, which has been drifting lower overall.”
Beyond the prospect of unlocking the economy, the pound found support from expectations that the Bank of England will soon signal that it may start to raise interest rates next year. The UK’s economic recovery and the potential of the Bank of England ending asset purchases and hiking are encouraging traders to buy the pound.
Concerns about the new variant
However, Sterling has also been influenced by concerns over a new coronavirus strain which pushed the currency lower. The new Indian variant along with concerns about reopening the economy on 21st of June have dented some of the pound’s recent gains. The new strain appears to be more transmissible than previous ones. While the variant did not appear initially to pose a big threat, growing concerns from the government as to whether the UK will fully reopen the economy or there will be delays, have hurt the pound.
The Indian variant is spreading across the UK and the latest statistics suggest Covid-19 cases are starting to rise sharply. The strain is mostly found in England. The government is waiting for more data before it decides to relax restrictions. Politics will also play a role, especially after the criticism the government has faced regarding its handling of the pandemic. Boris Johnson’s government is under political pressure following testimony to MPs by Prime Minister Boris Johnson's former senior adviser Dominic Cummings. This might drive the government to adopt a more cautious approach to June 21.
Any delay will be seen by traders and markets as negative for the pound in the short-term as it could hurt business and consumer confidence while postponing the ability of the economy to recover fully. The fact that such concerns about the economy have also coincided with increasing public scrutiny of the government’s response to the Covid-19 pandemic, they could potentially drive the pound lower against both the US dollar and the euro.
For this week then, the main drivers for the pound will be any signs showing that the government intends to fully lift Covid-19 restrictions on 21 June and any data regarding the impact of the Covid-19 “Indian variant”.
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Sterling has fallen against the euro and the US dollar, despite the lack of any clear data that could be responsible for the declines. This is also what makes it difficult to pinpoint what news or events could potentially affect the pound’s performance.
Analysts have argued that since the UK is no longer at the centre of financial news and data, and as interest has shifted to other currencies such as the euro, the British currency has lost momentum. It has also been noted that markets have priced in all the good news for the pound, so no bigger rises are expected at the moment. The successful vaccination programme and the reopening of the economy has provided support to the pound and the market Many analysts have also said that the weakness in the US dollar has also been partly responsible for some of the recent gains, which also highlights the fact that they are not any clear drivers that will push the pound higher. UK economic data has generally surpassed expectations, but this has not necessarily translated to any obvious additional upward pressure.
Higher Interest rates and Pound
Market expectations for higher interest rates, could also provide support to the pound. But for the market to become confident and positive, the Bank of England will need to show signs that is committed to raising interest rates. However, policymakers have not shown any firm conviction of raising interest rates any time soon. While inflation might be rising, BoE Governor Andrew Bailey believes that inflationary pressures are only temporary. But unless the Bank’s Monetary Policy Committee agrees in its majority that it’s time to raise interest rates, the pound is unlikely to rise unexpectedly. At the moment, the pound will be influenced by global market movements.
Cummings’ Testimony, the Pandemic and Indian variant
Sterling has been the second best performing G10 currency against the US dollar this year, because of investors being positive about the UK economy reopening, following its successful vaccination program. Britain started the third phase of reopening the economy last week, allowing indoor dining in pubs and restaurants. Retail sales data were upbeat as well as surveys of purchasing managers across different industries.
This week’s pound weakness has been partly explained by the lack of data, but also by pandemic concerns and Dominic Cummings’ testimony. Cummings’ testimony on Wednesday has been described as the “Sword of Damocles" and his explosive statements have undermined the government and could potentially keep the pound lower. He has likened the management of government officials during the crisis to "lions" being "led by donkeys". The pound may also be subject to news about the pandemic and the worrying rise of cases. The spread of the Indian variant has also added to pound pressure and these factors have partly kept the pound low, despite dollar weakness.
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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 paying 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 personal or business’ transfer needs.