The weakened global investor sentiment has kept the British currency under pressure against both the US dollar and euro. Analysts believe, however, that this will only be temporary as has already been seen throughout the last year. Fears of a global economic slowdown due to the pandemic and the spread of the Delta variant in Asia, as well as expectations the Federal Reserve will withdraw stimulus have hurt global sentiment.

The pound is mainly impacted by Bank of England policies and domestic economic developments but also by global investor sentiment. As it stands, there is a risk-off/risk-on binary which is affecting the foreign exchange market. Pro-cyclical currencies such as the AUD, CAD, and NZD tend to appreciate during good times, as opposed to countercyclical ones which appreciate in bad times. In a risk-off world where traders are not optimistic, and want to avoid risks, such currencies as the AUD and NZD become more vulnerable. In the current situation, the spread of the pandemic and the rapid rise of the Delta variant in Asia has hurt these pro-cyclical and commodity currencies as their main trade partner is Asia.  The pound is also sensitive to global risk sentiment. The trajectory of the pound will then depend on investor sentiment.

Market sentiment: Factors to consider

The main concerns for markets are as we mentioned the Delta variant’s spread in Asia and worries about the Federal Reserve withdrawing financial support. These concerns have prompted traders to wind back their bets on a strong economic recovery. With the general sentiment being cautious and nervous, the pound is under pressure, while the US dollar has strengthened.

  • Federal Reserve

The Fed is expected to announce a reduction to its quantitative easing programme some time between the Jackson Hole Symposium and September. This will open the way to a rate hike towards the end of 2022 and beginning of 2023. The news has now pushed the US dollar higher, whereas the pound is as low as it was the end of July.

  • Fears of slowing economic growth

The expected taper to the Fed’s programme combined with fears of slowing economic growth as Asian economies grapple with rising Covid cases has clouded market sentiment. The two factors are interrelated, as economies are currently dependent on and expectant of support from their central banks. With the Fed withdrawing support and the Delta variant spreading across Asia and hurting economic growth, the question is whether this is just a temporary concern. For analysts this won’t change markets massively and that the Fed’s anticipated tapering has already been priced in. The Covid threat has been there and continues to affect markets, and any weakness is seen by traders as an opportunity to buy cheaper assets.

So, this is seen as history repeating itself, with the pound’s weakness being just temporary.

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Sterling fell against the US dollar following global stock markets’ plunge. The fall was driven by a sell-off in Chinese shares, which dampened risk sentiment and led to increased trading of the US dollar ahead of a US Federal Reserve policy meeting.

Risk-averse market sentiment

As we have seen recently, the pound is sensitive to how global markets are fairing as well as how the pandemic is progressing. According to some analysts, the pound could find support if cases continue to fall, especially since data on Monday showed that new Covid-19 cases in Britain had fell for five consecutive days. Market analysts have suggested that the pound’s fall was mainly driven by nervous and risk-averse market sentiment due to the sell-off of Chinese tech stocks. Risk trades have been hit as a result and so has the pound.

For investors, a lot will depend on the two bank meetings coming up: the two-day Fed meeting later on Tuesday, and the Bank of England meeting next week. The BoE’s interest-rate setter Gertjan Vlieghe while speaking in an event explained that the the central bank should not cut back its stimulus before 2022, as the recent rise in inflation is temporary while Covid-19 poses a significant risk to growth.

Covid-19 declines offer a boost

Earlier on Tuesday, the pound got a boost after the number of new positive cases fell significantly. Investors will expect to see more statistics about the numbers of cases and deaths before they can make informed decisions.

The recent rising cases had an impact on economic data which showed that the economy was growing at a slow pace as businesses complained about the rising cases and employees self-isolating after coming in close contact with someone who had been tested positive. The ongoing pandemic and the risks posed by it have confirmed that it is perhaps too soon for the Bank of England to raise interest rates, as it needs to continue its financial support rather than tighten its programme. The rise of the Delta variant of Covid-19 combined means that the bank needs to continue offering support to the economy.  

If Covid cases continue to fall then the pound could find support. The UK has also acted as a test case, and it remains to be seen whether its decision to reopen its economy has been the right one. Nonetheless, analysts argue that data has shown that the UK economy does not depend on the virus and that vaccines are working. If the country does succeed to beat the Delta variant, without its economy being massively affected with further restrictions, then their example could be followed by other economies. This could further help the pound which is influenced by global sentiment.

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The improved global market sentiment and the slowing of Covid-19 case rates has helped the pound to recover, but Brexit anxieties could pose a potential threat to the currency.

Covid-19 and the NHS app

This week alone 96 deaths have been reported, the highest number since March. While on 1 June there were 0 coronavirus deaths, 1,114 deaths have been reported since then with 73 deaths being reported on Wednesday (21 July). The vaccination programme has not managed to break the link between infections and fatalities, with the total number of deaths from the pandemic reaching 128,896. However, new cases have not risen considerably, as the number of new cases that were reported on Wednesday was 44,104, slightly higher than the previous week’s 42,302. As it stands, 46,388,744 people have been vaccinated at least with the first shot in the UK. According to statistics, around 39,035 people had their first jab on Tuesday, while 161,279 people had their second shot yesterday, with 36,404,566 people now being fully inoculated.

With the ongoing self-isolation of workers due to coming into close contact with a positive coronavirus case, businesses have been affected, while the government has expressed its apologies for the inconvenience. Director of food and sustainability at the British Retail Consortium Andrew Opie told The Times that the "pingdemic” has put pressure on retailers who found it difficult to keep stores open and shelves stocked, demanded that the government needed to act fast.

Boris Johnson, speaking at the last PMQs before the summer recess, said "everybody understands the inconvenience of being pinged". The prime minister himself had to isolate after coming into contact with Covid-positive Health Secretary Sajid Javid last week.

Labour leader Sir Keir Starmer accused the prime minister of the mixed messages regarding the NHS Covid-19 app and said: "When it comes to creating confusion, the prime minister is a super-spreader.” Starmer had to isolate himself following one of his children being tested positive.

According to the figures from the ONS, around 9 in 10 adults in all parts of the UK could possibly have Covid-19 antibodies with the estimates ranging from 88.6% in Scotland to 92.6% in Wales, 90.0% for Northern Ireland and 91.9% for England.

Brexit and Covid-19: How will the pound fair?

It simply depends on improved market sentiment and the management of the Covid-19 Delta variant. The near-term outlook for Sterling will be determined by concerns regarding the Delta variant and whether investors have fully priced in the news.  If they have done so, then possibly the currency and market sentiment will improve. 

Brexit remains a threat to the currency too, as the UK and EU could find themselves at the opposite end of the table over the Northern Ireland question. On Wednesday, the UK announced its intention to renegotiate certain points included in the Northern Ireland protocol, and argued that in its current form it will create problems for trading goods between Great Britain and Northern Ireland. The release of the command paper outlining the UK government proposals about how the Protocol should be changed poses a major challenge to the EU.  This move could potentially hurt the pound, according to analysts. However, they believe that this could become a more serious concern as we move closer to 1 October with potential legal battles and EU threatening the UK with the imposition of trade sanctions.

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.