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.

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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.

The British Pound has risen following comments by the Bank of England's Governor Andrew Bailey that the rate will not be cut to 0% or below in the coming weeks. With the ongoing vaccine rollout and positive market sentiment about a quick economic recovery, the Bank appears to be willing to wait and see how the UK economy fairs before taking interest rates into negative territory.

Vaccine rollout

The government has promised to vaccinate 15 million people in the top four priority groups over the next five weeks and 17 million more in the five remaining groups by spring. According to the government’s immunisation plan, fifty special vaccination centres will support hospitals and doctors to provide 2 million jabs a week by the end of January.

The inoculation plan was unveiled on Monday as the NHS announced that 866,000 people in England were vaccinated the first week of January. On Monday, seven national vaccination centres opened in England, as well as 200 hospital sites and many GP centres. 50 more special centres will open by the end of the month. Many GPs believe that the 2m-a-week target can be achieved, despite MPs’ complaints in the parliament that the supply was chaotic.

More Vaccinations, Stronger Pound

The more people are vaccinated, the sooner the pandemic will be controlled, and the economy will recover. If everyone is strong and healthy, then the body of the economy and the country will also be strong and healthy. This will ensure a robust economy and will affect whether the Bank of England changes interest rates and its quantitative easing programme. If the BoE chose to lower interest rates, this would have been with the aim of stimulating lending and injecting a flow of money into the economy during the lockdown. However, such drastic measures would have pushed the pound lower. 

The governor of the BoE highlighted that there were too many concerns about negative interest rates, and that members of the Bank's Monetary Policy Committee debated their possible benefits. He has also warned that negative interest rates may hurt economic recovery and he appeared to be against such a move followed by such countries as Sweden, Denmark and Japan. He said: there are “a lot of issues” when considering using negative interest rates as a fiscal tool: “At first glance they are counter-intuitive.” He added: “First of all, no country has really used negative interest rates at the retail end of the market.”

There is, however, growing speculation after the recent comments by Silvana Tenreyro, a member of the Bank’s rate-setting Monetary Policy Committee, that using negative rates is a possibility and can be done without depriving the banking system. Interest rates have been at a historic low of 0.1% since last March in an attempt to protect the economy from the pandemic. If the possibility of negative interest rates is slowly reduced in the coming weeks, the pound is expected to get a further boost.

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The possibility of the Bank of England pushing interest rates into negative territory has been hinted at by a member of the BoE’s Monetary Policy Committee. If interest rates go lower, it is expected that the pound will be negatively impacted in the next few months. The decision to use negative interest rates is considered by the bank as positive in regard to offering further support to a struggling economy.

MPC member Silvana Tenreyro said in an online speech that negative interest rates will boost UK growth and inflation. "Cutting Bank Rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus," Tenreyro noted. Tenreyro said the Bank of England has been in contact with financial services firms discussing the potential impact of negative interest rates. She said: "Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time."

How has the pound performed in 2021?

The pound has not enjoyed a good start to the new year, as it dropped against the euro and the dollar. The fact that the UK and EU reached an agreement on Christmas Eve has not made the situation better either, despite the hopes of some economists. Additionally, they are increasing concerns about the economy due to the stricter lockdowns. This has raised expectations of a further interest rate cut by the BoE.

The possibility of lower interest rates will also make UK money markets less attractive, turning investors away from the pound and towards other investments.

What do analysts and traders say?

Analysts expect that the upcoming Bank of England meeting on 4th February will garner a lot of attention, and as we get closer to it there will be growing speculation on the possibility of an interest rate cut.  

The pandemic has not helped either, as many economists believe that it has dampened sentiment towards Sterling and resulted in concerns about a slower economic recovery and a more cautious Bank of England. At the same time, other analysts disagree and do not expect an interest rate cut this February. Robert Wood, UK Economist at Bank of America said: "We do not expect the BoE to cut Bank Rate in February. Banks do not seem ready and some rate setters argue negative rates could be counterproductive when GDP is falling.” If this happens then the pound may rise.

With the pandemic and ongoing vaccinations, it is not yet clear how the UK economy will fair. Nonetheless, the UK government is committed to delivering CovidD-19 vaccines to the most vulnerable categories by mid-February. If everything goes as planned, and people are successfully vaccinated, then the BoE might reassess its plans and reconsider whether cutting interest rates is the best possible solution. If the economy shows signs of recovery, then the pound will respond favourably.

Are you Transferring Funds Abroad?

If you are transferring funds overseas, contacting a currency specialist could save you time and money. Whether you are sending money to family or 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.

The British pound is higher against the Dollar and lower against the euro on Friday, after the release of disappointing data showing that the UK economy contracted more than expected.

The UK GDP monthly release came at -20.4%% MoM in April vs. -18.4% expected, revealing that the economy contracted more-than-expected in April. This is the biggest month-on-month drop in GDP ever recorded and 10 times larger than the sharpest fall before Covid-19. The figures show that the GDP fell by 10.4% in the three months to April as a whole.

The Gross Domestic Product is released by the Office for National Statistics and is a measure of the total value of all goods and services produced by the UK. It is a broad measure of the UK economic activity and, in general, positive news such as a rising trend in economic activity can have positive impact on the pound, while a drop in numbers can be negative. 

The ONS reported that “April 2020 has experienced sharper falls than March as the negative impacts of social distancing and ‘lockdown’ have led to a significant fall in consumer demand and business and factory closures, as well as supply chain disruptions.”

 

Biggest monthly fall in UK history

According to the Office for National Statistics, the UK posted the biggest monthly fall in GDP in UK history this past April. The drop represented a 24.5% decline from April 2019, as lockdowns due to Covid-19 hit the economy. 

This week the Organisation for Economic Cooperation and Development (OECD) said that the UK economy would experience the worst damage from Covid-19 compared to any other developed nation. It predicted that GDP would contract by 11.5% in 2020 or 14% if there was a second lockdown due to the return of the virus.

Anneliese Dodds, Labour’s shadow chancellor, said that the OECD forecast was “deeply worrying” and that this was due to the government’s “failure to get on top of the health crisis, delay going into lockdown and chaotic mismanagement of the exit from lockdown.” 

Rishi Sunak, said the UK economy was similar “with many other economies around the world” and that the government’s intention was to “support people, jobs and businesses through this crisis – and this is what we’ve done.”

 

The OECD explained that “The failure to conclude a trade deal with the European Union by the end of 2020 or put in place alternative arrangements would have a strongly negative effect on trade and jobs.” A no deal Brexit would “significantly damage the UK’s potentially fragile recovery from its deepest recession in almost a century,” credit ratings agency Moody’s warned.

Laurence Boone, the OECD’s chief economist, said the world economy was “walking a tightrope” and that the possibility of a second outbreak could lead to another lockdown and recession. She said: “These scenarios are by no means exhaustive, but they help frame the field of possibilities and sharpen policies to walk such uncharted grounds. Both scenarios are sobering, as economic activity does not and cannot return to normal under these circumstances. By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments.” 

 

With the latest GDP figures, it has been confirmed that the slump in economic activity has been severe. The pound fell against the euro but was not shocked as the disappointing numbers were expected. As Sunak highlighted, the UK is not alone in experiencing the economic contraction due to the lockdown, as global economies are deeply hurt.

If you are sending money abroad and are worried about the pound’s volatility due to the current market conditions, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.