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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Brexit is back in the picture, as there are talks of a potential trade war between the UK and EU over the coming days after both sides failed to reach agreement on the Northern Ireland protocol. The EU has threatened to impose sanctions on UK exports to Northern Ireland if it fails to implement the terms of the Northern Ireland protocol next month. If things escalate, the pound will also be affected, as it usually falls when concerns around Brexit rise.

EU press conference

On Wednesday, UK and EU officials met in an attempt to resolve any disputes over trade rules for Northern Ireland. In the EU press conference following talks with Lord Frost on Northern Ireland protocol, Maroš Šefčovič, the vice-president of the European Commission who serves as the EU’s lead on post-Brexit negotiations with the UK, said that fundamental gaps remained in the UK’s implementation of the deal. On the Northern Ireland protocol, both sides agreed in 2019 this was the best solution to protect the Good Friday agreement. In December last year some solutions were agreed, including grace periods and exemptions in areas where the UK was not ready to implement the protocol. But he highlighted that “we cannot undo the core of the protocol”, as there are still “numerous and fundamental gaps” in the UK’s implementation of the deal.

He also confirmed that the EU could take retaliatory action. Šefčovič says the EU is a peace project, and, as he said, he did not arrive with a list as he is looking for a solution. But he did confirm that the EU could impose tariffs on some UK goods if the Northern Ireland protocol was not implemented. The protocol is designed to prevent checks at the border with Ireland. So, the EU agreed to let the UK conduct these checks at the GB/NI border. The easiest thing would be for the UK to accept EU SPS standards. Nonetheless, Šefčovič says he has a good and honest relationship with Frost and believes in Frost’s “best intentions”.

How will the pound react?

If the relationship with Brussels breaks this could weigh on Sterling sentiment in the short-term. If the EU does take any retaliatory action, and tensions escalate, then the possibility of the UK losing access to the single market would raise significant risks for the UK economy and hurt the pound.

The Prime Minister’s spokesman said: "The protocol was formed in a spirit of compromise, in challenging circumstances. It was not a finished solution... and we didn't expect the EU to take such a purist approach to it. We are working very hard to resolve these issues consensually. But the Prime Minister has always made clear we will consider all our options in meeting our responsibility to sustain peace and prosperity in Northern Ireland.”

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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.

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The pound has potential to rise further as more positive news is expected, while some risks remain relating to concerns about the pandemic and a rising euro. The latest Lloyds business barometer for the month of May rose to a three-year high, while Gertjan Vlieghe, an outgoing Monetary Policy Committee member at the Bank of England (BoE), said on Thursday that interest rates could rise by the middle of next year. At the same time, with a thin economic calendar the pound could fluctuate unpredictably in what is expected to be a volatile week ahead. also mean that the pound

Rising Renmbibi exchange rates

The Pound-to-Euro exchange rate could be volatile with the potential to rise higher if the recent boost in Renminbi exchange rates leads the Peoples’ Bank of China (PBoC) to buy non-Dollar currencies in a bid to ward off dollar appreciation pressures. China’s exchange rates rose after a decision to allow USD/CNH to fall. The move was the result of concerns regarding rising Dollar-denominated commodity prices and was driven by an attempt to offset the increase through a stronger exchange rate. This eventually resulted in the rise of other Chinese exchange rates that are a macroeconomic hazard for the PBoC, as research analysts have noted. The fall of the USD/CNH supported the Renminbi against all China Foreign Exchange Trade System (CFETS) currencies.

The rise of Renminbi is problematic for the PBoC because it results in cheaper imported goods and could drive the bank to buy other currencies in an attempt to reduce its other exchange rates. In general, a prolonged period of RMB appreciation and USD weakness could become an issue for policymakers and the PBoC could use further administrative tools to control this.

The currency pair could also be further affected by the BoE Governor Andrew Bailey’s speech on Tuesday on the subject of "Building a Finance System Fit for a Clean, Resilient and Just Future."

Euro appreciation could drive pound lower

Analysts have explained that the euro could be the main currency in Europe to benefit from the PBoC’s potential attempt to manage extreme currency appreciation. The pound-to-euro exchange rate has performed well, However, if the euro rises, this will potentially push the pound to euro rate lower. On Wednesday, when the ECB releases a report on the international role of the euro, the common currency could rise, and this could possibly push the pound lower.

Covid-19

At the moment, the markets might be relatively calm in both the US and the UK, and after Friday's volatile trading, but fears of Covid-19 variants may send sterling down, some analysts are saying. FXStreet’s analyst Yohay Elam stated that “People residing in the UK may enjoy the long weekend at home and in several European countries – but not in France nor Germany, where they are required to quarantine. These restrictions serve as a reminder of the B.1.167.2 variant. Sterling is on the back foot due to these fears.”

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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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The pound has recovered some of its earlier losses, following the release of the UK Consumer Prices Index. Rising in line with market expectations, inflation increased 0.6% month-on-month in April, as the rise in the prices of petrol, gas and electricity pushed the cost of living higher.  

The Office for National Statistics released on Wednesday figures that showed the Consumer Prices Index (CPI) rose by 1.5% in the 12 months to April 2021, making it the highest reading since last March.

The rise in inflation was driven by rising household utility bills, higher motor fuel prices and clothing. The ONS said: “Price movements for household utilities, clothing, and motor fuels are the main reasons for the higher monthly rate this year than a year ago.”

Food prices also rose in April driven by increased prices for chocolate, ice cream, breads and cereals. The ONS noted that: “Food prices rose by 0.9% between March and April 2021 but were little changed between the same two months in 2020. Prices for a variety of bread and cereal items rose this year but fell a year ago, resulting in an upward contribution of 0.04 percentage points. There was a similar upward contribution from across a range of sugar, jam, syrups, chocolate and confectionery items, with standout movements coming from large bars of chocolate and chocolate covered ice-cream bars. Prices for these items rose between March and April 2021 but were being discounted between the same two months in 2020.”

The Bank of England’s target is for inflation is 2% in the medium term, and analysts expect inflation to continue to rise in the next few months, as the economy improves and recovers from the pandemic. A stronger pound will help inflation as the cost of imports will fall.

Will rise in inflation be short-lived?

Ruth Gregory, senior UK economist at Capital Economics, believes that April’s rise in inflation will be short-lived: “There were pockets of inflation in those sectors that are reopening, with clothing inflation bouncing back from -3.5% to +0.5%, as retailers continued to reverse the aggressive discounting during lockdowns, and furniture inflation rising from 4.5% to 5.8%.… But in April, these movements were partially offset by some of the pandemic-induced surges in inflation continuing to fade. Data processing equipment fell further from 5.9% in March to 0.2%. Meanwhile, second-hand car inflation dropped from 1.2% to 0.2%.”

Factory gate inflation rose by 3.9%

The rise in commodity prices, drove UK manufacturers to increase their prices in April. The cost of goods after they leave the factory (factory gate prices) rose 3.9% in the 12 months to April 2021. Producer prices rose 0.4% during the month, something that could eventually affect consumers in the shops. Metal, crude oil and mineral prices also rose affecting manufacturers with higher input prices, which jumped by 9.9% compared to April 2020.

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The pound has risen to its highest level against the US dollar in almost three months. With the dollar weakening, Sterling rose to its highest level since 24th February, supported by jobs data that showed a drop in the UK unemployment rate, to 4.8%, and increase in employment. The stronger than expected jobs report and the weaker dollar help boost the pound.

UK Employment Rises

Employment data from the UK showed a rise in employment with 84,000 gaining jobs in April following the reopening of the economy and the loosening of lockdown measures. The labour market is characterised by high-skilled workers furloughed or made redundant pandemic or low-skilled workers unable to gain new employment. Employers began hiring again in March, which helped to reduce unemployment for a third consecutive month. The number of workers seeking employment fell to 1.6 million in the three months to March, compared with 1.7 million in the three months to February, the Office for National Statistics said. The quarterly rate was down to 4.8% from 4.9% in February.

The number of employees on company payrolls continued to rise but remained 772,000 below pre-pandemic levels. The number of job vacancies also continued to rise into April, with most industries showing signs of growth.

Jobless rate to Rise in Autumn

However, ING expect the jobless rate to rise at around 6% in the autumn, as the furlough scheme comes to an end September. James Smith from ING stated: “We can already see signs of a rapid turnaround in the hospitality sector over recent weeks, where online job adverts have returned quickly to pre-virus levels since the reopening road-map was announced.

While this is a ‘flow’ measure and clearly isn’t the same as saying employment has returned to where it was before the pandemic, it does suggest some of the past employment losses we’ve seen over recent months could be quickly reversed over coming months.”

Thomas Pugh of Capital Economics also said that the unemployment rate may rise to around 6.0% by the start of 2022 but should fall eventually: “The unemployment rate may still rise over the rest of this year. But this will probably be due to people re-joining the labour market rather than more people losing their jobs. Of course, this is all dependent on the path of the pandemic, and whether the UK is able to exit the crisis - or if new variants force new restrictions to be imposed.”

Employment Data is welcome news

The jobs data was welcomed by the Minister for Employment Mims Davies MP who said that the report shows how resilient the jobs market has been. He said: “A continued fall in unemployment, a further rise in vacancies, and growth in the employment rate is welcome news as we continue on our roadmap to recovery. While there is more to do to make sure we support jobseekers over the coming months, these figures highlight the resilience of our jobs market and ability for employers to adapt – and through our Plan for Jobs we’re continuing to create new opportunities for people right across the country.”

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May is expected to bring some volatility for the pound which can be a good thing for traders of the currency. The first week of May will be an important one for the pound as on the 6th of May, the Bank of England (BoE) will deliver its monetary policy decision and its quarterly Monetary Policy Report. Investors and analysts are also expecting the Scottish election to be a pound-sensitive event as it could result in a majority for pro-independence parties. In the near term, both events could affect the pound and set the tone for currency trading throughout the last month of Spring.

A hawkish tone from the bank could weigh on the pound

Economists will be closely watching the BoE’s upcoming meeting to understand whether the bank will change its quantitative easing programme by reducing its rate of asset purchases.  This is seen as a necessary measure to provide liquidity to the economy, and it will open the path for raising interest rates in the future. For this reason, if the bank decides to make such a move, markets will be pleasantly surprised, as three months ago the bank was seriously considering pushing interest rates into negative territory.

While such a move is welcomed and appropriate since the economy is recovering, it is still too early, and some economists believe that the bank will not be raising interest rates anytime soon. The BoE is more likely to remain cautious, and this might put some pressure for the pound. While the market expects interest rates to remain unchanged, they are not quite sure about the bank’s intention to reduce quantitative easing. For some analysts, there are concerns about the pandemic and unemployment which could rise following the withdrawal of the government’s support.

Scottish elections

Scotland will be voting for the next Holyrood parliament on 6th of May and political commentators say a strong result for pro-independence parties will inevitably lead to another independence referendum. However, financial analysts do not expect the Scottish elections to have a major impact on GBP. Regardless of the result, most experts do not believe this will immediately lead to an imminent vote for independence, as a second independence referendum is probably years away.

As things stand, it is also unlikely that Prime Minister Boris Johnson’s government will grant consent to hold a second referendum.  While who holds the power to allow a vote could ultimately be tested in the courts, at the same time the probability for an imminent referendum is small. A refusal from Boris Johnson could also further strengthen pro-independence sentiment in Scotland. The possibility of a second independence referendum is not going to go away and will play a key role in the next UK-wide general election in 2024.

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The pound strengthened against the euro, due to positive market sentiment as a result of the intense and ongoing vaccination rollout programme. Goldman Sachs has speculated that the pound could even rise further against the euro.

Rishi Sunak’s Budget announcement boosts sentiment

Following the budget announcement, the Wall Street investment bank told its clients to trade in Sterling as the UK economy is expected to grow in the coming months.  UK Chancellor Rishi Sunak’s budget announcement last Wednesday revealed spending and taxation plans that were better than expected. Sunak announced that an additional £65 billion will be provided for spending, grants and tax breaks with the total additional spending and benefits reaching £352 billion. "The UK economy is well-positioned for the coming recovery," Goldman Sachs’ Zach Pandl said. "The support program laid out by the government surprised consensus expectations to the upside, and included a number of economic incentives aimed at medium-term investment." Most economists believe that supporting the economy generously during the covid crisis will help the economy grow stronger faster and avoid any long-term negative effects.  

Vaccination programme also offers support to pound

Goldman Sachs’ economist Pandl also noted that the UK’s vaccination programme has helped the economy. He said: "Solid household and business balance sheets should soon translate into robust growth, as the UK’s strategy of prioritising getting more people vaccinated with a single dose appears to be paying dividends. We are therefore keeping open the short EUR/GBP component of our long GBP/CHF cross trade.”

Britain has outperformed on its vaccination programme, especially when compared to other European countries, with more than 21 million people having received the first dose of a Covid-19 vaccine.

UK business confidence hits 12-month high

The UK’s fast vaccination programme has also had a positive effect on businesses’ confidence. According to the latest Business Trends report from accountancy and business advisory firm BDO LLP, service sector confidence jumped in February to its highest level since the pandemic began.

BDO’s Services Optimism Index rose to 94.13 in February from 86.60 in January, back towards the long-term average of 100. This is the highest reading in 12 months for the survey, which covers a a wide range of industries from retail and hospitality to professional services.

Also, according to polling firm YouGov, British consumer confidence has risen to its highest level since the coronavirus pandemic started, according to polling firm YouGov. YouGov reported that  consumer confidence rose to 105.4, driven by expectations for house prices, business activity, and household finances over 2022.

The governor of the Bank of England, Andrew Bailey, has also expressed optimism about the economy but also cautioned for unrealistic expectations, as life will not return to pre-Covid levels. He noted that there is a “growing sense” of economic optimism building. He said that Covid has hurt demand and supply which some of the structural changes in the last year will not really change.

Bailey said: “The best we can say is that how the output gap develops in the recovery from Covid will depend on the net effect of the two [demand and supply], both of which will need to move by more than in normal recoveries. There is another element to this part of the story which is hard to assess at present, namely to what extent the more structural changes we have seen during the Covid crisis will persist, and what effect they will have on the recovery? In general, however, economists remain optimistic and the pounds recent surge owes a lot to the government’s successful vaccination programme.

 

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Budget 2021: Pound to Remain Sensitive

Rishi Sunak’s budget has unnerved the pound as investors have been waiting to hear the details. A bullish scenario for the UK currency will be the announcement of more financial support to help recovery, while any attempt to balance the book that will affect growth will hurt the pound.

Main Points: What did Rishi Sunak say?

The chancellor said that he would do “whatever it takes” to help the economy recover from the pandemic as the damage has been great. It is estimated that more than 700,000 people lost their jobs, the economy shrank by 10% and borrowing has been at its highest. Sunak noted: “It’s going to take this country, and the whole world, a long time to recover from this extraordinary situation.”

He has underlined his own and the government’s desire to be clear and transparent about fixing the public finances, and about what plans they have in the future.

Growth

Expectations are for a quick recovery by the middle of next year. However, the economy will still be 3% smaller even in 5 years from now. GDP will grow by 4% this year, and by 7.3% next year. The coronavirus has profoundly affected the economy and Sunak’s comments suggest that tax rises should be expected in the near future.

Furlough

The chancellor said that unemployment will reach 6.5%, which will be much less than originally forecast, with 1.8 million fewer people expected to lose their jobs. The furlough scheme will continue until the end of September. Employees will receive 80% of their wages until the end of the scheme but businesses will have to contribute 10% in July and 20% in August and September. The self-employment income support scheme will also be extended and the £20-a-week uplift in universal credit will be extended for six months.

Grants for Businesses

Sunak announced a £5bn restart grant for businesses and noted that the total direct cash support to businesses has reached £25bn. The Treasury is also starting a new loan scheme with loans ranging between £25,000 and £10m.

Spending

£352bn will be the Covid support package this year and the next and Sunak underlined the amount that was spent to help the economy recover.

Borrowing

Sunak said the budget deficit will be £355bn this year and will continue at high levels with the underlying debt rising indefinitely. He said that due to his actions, borrowing will fall to 4.5% of GDP in 2022-23, then to 3.5% in 2023-24, and 2.9 and 2.8% in the following two years. He added: “It’s going to be the work of many governments over many decades to pay it back, just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

Corporation tax

In April 2023, the rate of corporation tax will go up to 25%. But Sunak explained that this will affect businesses that are making profits of more than £250,000 and will be taxed at the full 25% rate. Companies with profits of less than £50,000 will remain at 19%.

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