Concerns about the Covid-19 pandemic are weighing on the markets and have impacted on global investor sentiment again, amid a surge in coronavirus cases in countries such as India and Japan. This has also pushed the value of Pound Sterling against the Euro and Dollar lower, confirming that global market sentiment will need to improve to boost the pound.

Yesterday, European markets also experienced their biggest fall this year, with airlines and hospitality firms severely affected. The pan-European Stoxx 600 lost 1.9% and the London FTSE 100 lost 2%.

The release of ONS data on Wednesday morning has done little to change things. UK consumer price index (CPI) data showed that the inflation rate rose to 0.7% in March 2021 from 0.4% in February. This is the first increase from fuel prices since February 2020 which helped drive the increase in March. UK CPI inflation rose by 0.3% m/m. However, in the long-term, increases in several of the producer price index (PPI) numbers signal potentially more inflation in the future which will be positive for GBP, as this will drive the Bank of England to tighten UK monetary policy.

Weaker pound

The pound is generally affected by global market sentiment and it traditionally benefits when the global economy is growing, and investor sentiment is positive. This is why declines in the stock market are reflected by similar declines in the pound. While positive economic releases can have a beneficial effect on the pound, the global conditions can overshadow such domestic data.

The pandemic has had a massive impact on the pound’s travails, and this is also what is happening right now as risk appetite has been under pressure with the number of Covid-19 infections rising in Asia. The WHO said that the number of cases has surged in all regions except Europe. In Japan, Tokyo and Osaka have asked the government to declare a state of emergency from 29th of April 29 to 9th of May 9.

FX analysts at Bank of America have said that “a pro-cyclical, risk-on environment should be GBP supportive as it will for other high beta currencies. What will see GBP standout is whether the UK can continue to attract investment inflows, which have been a hallmark of the recent appreciation."

UK Inflation Data

The release of inflation data has not influenced the pound, as investors are waiting to see how the country manages to move back to normality. Investors will be more interested in Friday’s release of PMI data for April, as it will offer a clear picture of how strong the rebound has been after reopening businesses on the 12th of April.

Wednesday’s release of inflation numbers showed that the annual CPI inflation rate has gone from 0.4% in February to 0.7% in March according to the ONS, and it was driven by a 0.3% month-on-month rise recorded in March.

"The UK has reached a turning point in its economic reaction to the pandemic where price growth is now on an upward trajectory, and should remain so for some time to come. Year-on-year consumer price growth slowed to 0.4% in February from 0.7% in January, primarily due to falling prices in clothing and footwear," Paul Craig, portfolio manager at Quilter Investors said. He added: "From here, inflation may tick markedly higher if the steady drip of consumer spending morphs into a waterfall as lockdown restrictions are lifted and households spend some of their accumulated pandemic savings.”

The UK will need a bit more time to recover and the economy to become more normalised until the Bank of England will consider raising interest rates. The Bank of England has stressed that the economy will need to reach pre-pandemic levels and the inflation target to be met, before it makes any move.

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Sterling fell to a one-week low against the dollar on Tuesday following the release of disappointing data confirming that British economic recovery will be slow.

Neil Wilson of Markets.com said that “Sterling extended a selloff after the GDP numbers disappointed”: “The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.”

GDP numbers

The Office for National Statistics reported that the Gross domestic product rose by 1.8% in May after falling 20.3% in April, and a 6.9% in March. This was due to the reopening of businesses with factories and construction workers returning to work. Britain’s manufacturers increased their output by 8.4% while the construction sector grew by 8.2%.

However, City economists forecast a 5.5% rise in growth for May. Additionally, the last quarter, the economic slowdown has been worse than expected. The data today shows that the UK economy contracted by 19.1% in the March-May quarter.

Jonathan Athow, Deputy National Statistician for Economic Statistics, says: “Manufacturing and house building showed signs of recovery as some businesses saw staff return to work. Despite this, the economy was still a quarter smaller in May than in February, before the full effects of the pandemic struck. In the important services sector, we saw some pickup in retail, which saw record online sales. However, with lockdown restrictions remaining in place, many other services remained in the doldrums, with a number of areas seeing further declines.”

Services sector disappoints

The services sector fell by 18.9% in the last quarter and production shrank by 15.5%, according to the ONS. There was a 37.8% fall in education and a 31.4% drop in health output. Food and beverage service activities contracted by 69.3%. Manufacturing output fell 18.0% in March-May and the transport equipment manufacturing dropped by 45.7%.

Economists

Jeremy Thomson-Cook, Chief Economist at Equals PLC, said that that there are few signs of the UK economy recovering quickly: “May’s run of GDP, industrial production and services sector activity confirms that it’s easier to fall down a lift shaft than walk up a flight of stairs and the ongoing economic recovery will need many more months before any vague sense of normality is restored. There are few signs that the UK economy is close to anything resembling a v-shaped recovery although we expect that June’s data will be better than May’s which have shown little more than a false dawn.”

James Smith, Research Director of the Resolution Foundation, says that economic recovery from the Covid-19 has started: “Today’s data tells us that the UK economy started to recover as lockdown restrictions were eased in May. But what would normally be seen as strong growth in May of 1.8 per cent mainly reflects the depth of the lockdown’s economic damage, rather than a swift or V-shaped recovery. The economy was still just three-quarters of the size it was as recently as February. While we should expect strong immediate bounce backs in many sectors, such as retail which grew by 12 per cent in May, what recovery we actually see from here will depend on how people respond to the easing of restrictions and, crucially, the course of the public health crisis. Ultimately, the UK economy is unlikely to return to close to its pre-covid economic path until a vaccine or treatment is found.”

Indeed, the figures are dire and the challenge great. The chancellor of the Exchequer, Rishi Sunak, said that the numbers “underline the scale of the challenge we face. I know people are worried about the security of their jobs and incomes. That’s why I set out our Plan for Jobs last week, following the PM’s new deal for Britain, to protect, support and create jobs as we safely reopen our economy. Our clear plan invests up to £30bn in significant and targeted support to put people’s livelihoods at the centre of our national renewal as we emerge through the other side of this crisis.”

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