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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Sterling rose for a second week against the dollar on Friday, supported by a hawkish Bank of England and a successful vaccination program which has enabled the gradual reopening of businesses.

The Bank has begun tapering asset purchases, while the country is restructuring its vaccine rollout program to help protect more quickly those in areas where a specific variant of the coronavirus, first detected in India, has emerged. The UK has been among the top countries with the fastest vaccination in the world, giving a first shot to almost 70% of the adult population and a second one to 36%, helping to reduce infection rates and deaths.

Near-term gains

The British Pound will likely remain supported against the euro and dollar over the coming weeks according to foreign exchange analysts. The fast vaccine rollout has allowed a sharp economic rebound which has been unprecedented. The positive sentiment around the vaccine rollout is expected to offer further near-term support, analysts have noted. NatWest analysts have said that "While the pace of rollout has been a factor, it’s the UK economy’s underlying sensitivity to the vaccine that has been the most important aspect," they add. "The UK has suffered the greatest hit to GDP of the developed economies during the pandemic and therefore has the most to benefit from the easing of restrictions." The positive vaccine story has already been priced in the current level of the pound and as such analysts do not expect many more gains. The vaccine programme and the latest Scottish elections which have eased anxieties about a second Scottish independence referendum, offered support to the pound, but further gains might be limited.

Upside potential for the pound?

With expectations of a third major unlocking on Monday 17th of May and a final unlocking on 21st of June, analysts see further upside potential for the pound. The recent gains are partly due to the Bank of England's policy meeting on the 6th of May where it was announced that the Bank will be reducing the scale of weekly quantitative easing purchases and raise economic forecasts. As the global economic recovery gathers momentum, strategists at UBS Wealth Management also expect the pound to advance further.

The Bank of England expects the UK economy to return to pre-pandemic levels before the end of 2021. However, NatWest analysts have warned that there are significant risks as we move ahead: “Brexit is weighing on trend growth. Softer productivity trends, deep economic scarring and a deteriorating sustainable current account deficit position are expected to impact negatively.”

Danske Bank has also said that they retain a bullish stance, but they believe there "is no obvious trigger for another sharp move" higher in GBP/EUR near-term. Strategists at Rabobank have also said this week that further advances will be rare, with a new 2021 high possible by year-end. Senior FX Strategist at Rabobank, Jane Foley said: "we continue to expect only a slow drift lower for EUR/GBP.

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With market sentiment strong as the economy is recovering and more people are vaccinated, economists will be looking with great expectations at today’s Bank of England interest rate decision. Despite the current optimism, the bank is not expected to raise interest rates from their current record low of 0.1%.

Will the bank raise its growth forecasts?

The economy has improved: the private sector has experienced fast growth, mortgage lending is at a record, and economists are forecasting that UK GDP will rise at its highest since the 1940s. The FTSE 100 share index hit its highest level in over a year yesterday, with banks, mining and oil companies benefiting from the global economic rebound.

Britain’s services sector has also posted its fastest growth in more than seven years, as the latest Service PMI jumped to 61.0 for April. Companies saw sharp increases in business and consumer spending, new projects and new orders rose at their fastest rate since December 2013. Service providers noted that the easing of Covid-19 restrictions across the UK has helped businesses and growth. Firms also employed more staff and employment growth accelerated to its fastest since October 2015.

Since the economy is doing so well, the BoE is expected to raise its growth forecasts today, in its latest Monetary Policy Report which will also be released on Thursday. Elsa Lignos of RBC has noted that the Bank will predict a smaller increase in unemployment this year: “Significantly, the extension of the government’s furlough scheme, which was announced at the budget, is likely to see the MPC lower its estimate of where it expects unemployment to peak once support is withdraw.”

Will the bank slow its stimulus programme?

At the same time, the Monetary Policy Committee will be considering when to slow its £895bn asset purchase stimulus programme, which is buying up around £4.4bn of government bonds each week. If there are any strong signals that it may do so, then the pound could rise.

Shamik Dhar, chief economist at BNY Mellon Investment Management, said that the “economy looks set to bounce back strongly in the second half, probably at double digit annualized growth rates, returning overall activity to pre-crisis levels this year. Inflationary pressures might build, but will probably be contained by a strong supply response in those industries that have been locked down. The Bank of England (BoE) remains a long way off tightening monetary policy, but could be one of the first central banks to signal it’s thinking about it, possibly in early 2022.” Despite the bright outlook, the economy will not return to pre-Covid levels. He added:

“The economy will return to pre-crisis levels of economic activity quickly, and possibly recover the pre-crisis trend level next year. But the composition of the UK economy has probably changed permanently thanks to the pandemic. While we will see a strong bounce back in ‘close contact’ industries, such as hospitality and travel, this year and next, they may never recover their pre-crisis share of the economy. ‘Remotely-consumed’ goods and services will remain a larger proportion of the economy than they were pre-pandemic.”

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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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Traders have warned of pound volatility if Scotland backs an independence bid. It is expected that the pound will suffer in the coming months if Nicola Sturgeon wins a landslide majority in next month's Holyrood election. Unless there is certainty that there will not be a second independence referendum, the British pound will be potentially under threat.

On 6th of May, Scotland will vote for the next Holyrood parliament and if there is strong result for pro-independence parties then more pressure will be placed on the UK government to grant Scotland the right for another independence referendum. SNP leader Nicola Sturgeon has already vowed to push for a second referendum and her demand will be strengthened if pro-independence parties win more than 50 percent of the vote.

While the pound has risen since a trade agreement was sealed with the EU, the ensuing political uncertainty following the May elections could mean that risk-averse investors will stay away from buying UK assets. Polls show the pro-referendum SNP party could win the vote, but, recently, there have been strong concerns about the party’s ability to secure a majority.

What currency analysts are saying?

A heavily pro-independence vote in next month’s Scottish Parliament election could mean a fall in Sterling as investors will avoid trading British stocks. Stephen Gallo, European head of currency strategy BMO Capital Markets, said: “Come early May the markets will wake up to this and probably trade the size of the majority or the end result. The stronger Nicola Sturgeon’s position is, the more headline risk there’s going to be over the next three to six months regarding this issue.” He also said that currency movement won’t be huge but a strong SNP will mean that Sterling will find it difficult to extend its rally. Goldman Sachs’ strategist, Sharon Bell said that a “prolonged period of political uncertainty, coming straight after 5 years of Brexit uncertainty, would be unlikely to encourage global investors back to UK stocks.” A second Scottish referendum will be risky, but UK stocks are still cheap after a disappointing performance due to Brexit.

What would happen if the SNP were to win the majority?

If the SNP win a majority, Sturgeon has said that her party will seek a second referendum, and this is the reason that analysts are concerned. In a recent briefing to its clients, Berenberg has noted that the Scottish parliamentary elections could result in a majority for parties supporting Scottish independence.

The SNP currently rules in a minority government, but polling suggests that it is on course to win a majority, increasing pressure on Boris Johnson’s government to accept another independence vote.

An Ipsos Mori poll for STV News this week predicted that 70 of Holyrood’s 129 MSPs will be from the SNP, which means that Sturgeon’s party will get an 11-seat majority. Alex Salmond’s Alba Party has failed to have any affect in the polls, but his party as well as the Greens also support holding a second referendum. Any combination of the above parties will result in a pro-independence majority.

"Such an outcome could make waves in markets and refuel worries about the UK’s prospects following Brexit – which has raised the tail risk that Scotland may one day leave the UK to re-enter the EU as an independent country," says Holger Schmieding, Chief Economist at Berenberg.

The results of the 2014 Scottish referendum and the 2016 Brexit referendum have highlighted how uncertainty can affect Sterling exchange rates. The pound fell following concerns about the outcome of the 2014 independence referendum but immediately rose after it was clear that Alex Salmond’s independence movement was defeated.

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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 strengthened as a result of a combination of factors including the reopening of businesses in April which helped support the pound at the start of the new week. April has been a typically good month for the pound with gains historically occurring in the second half of the month, and this could also be partly the reason. Foreign exchange strategists believe that this could be enough for the pound to continue trading well against the euro, especially with many economic data due to be released this week.

Economists and traders are expecting that this week’s economic releases will be proof that the UK economy is recovering as businesses reopen and the quick vaccination programme continues. With inflation coming out on Wednesday and the PMI survey for April out on Friday, markets are optimistic that the data will support the view that the UK is on track for a quick economic rebound. The PMIs are expected to show that economic activity is increasing as restrictions have been eased.

UK economic rebound

The pound has experienced a solid year, as investors speculated on a quick economic recovery due to growing confidence in the vaccine rollout programme. The UK economic outlook has improved the past few months as the successful vaccination programme supported a strong Sterling. Financial analysts and investors forecast that the UK economy will recover as more people are able to go out and spend money in retail shops. Already, there is an increase in shopping following the three-month lockdown, when on 12th of April non-essential stores reopened.

UK businesses report better than expected sales

With many UK businesses reopening, trading has increased as consumer demand was higher, and the reopening proved to be a success confirming that a strong rebound in the second quarter is possible. The ability of consumers to spend was also due to the government’s important furlough scheme which protected consumer income. From bank transactions to restaurant bookings and shop visits, it was evident that people were eager to spend when businesses reopened on 12th of April. Already, the first three days after the reopening, visits to retail and other shops increased instantly, pointing to a sharper recovery than initially expected.  

Consultancy Springboard’s statistics showed that footfall last week across all UK retail shops was 25 per cent lower than in the same week of 2019. However, the gap narrowed by more than half in a single week, reaching the level of trading after two months following the first lockdown. Retail parks was the major driver behind the surge, which was only 2 per cent down when compared with the 2019 level. Diane Wehrle, insights director at Springboard, described the first week of reopening as “an outstanding performance” for the UK retail sector and that with the reopening of indoor hospitality on 17th of May 17, “a further boost” to retail destinations is also to be expected.

Fable Data statistics also showed that spending in pubs and restaurants recovered to 42 per cent and reflected similar numbers in restaurant bookings tracked by Open Table. Government figures on public transport also showed that people were on the move, while vacancies also increased to pre-pandemic levels in April. Such measures showing people’s mobility, shopping and restaurant bookings are increasingly considered crucial indicators of the health of the economy and much more accurate when compared to official economic numbers. These near-real-time indicators reflect a more accurate picture of the economy as economists are hopeful that everything is going as well as could have been hoped.

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The British pound fell against the euro and US dollar, after the remarkable recovery it enjoyed during the first three months of the year. With the euphoria about the UK’s successful vaccination programme starting to wear off and a wider demand for the euro, the Sterling outlook is not looking as promising.

The pound performed very well against the euro in the opening quarter of 2021, but since February’s highs, it has dropped, suggesting that the Eurozone is performing comparatively better as the European coronavirus vaccination rates have increased. For many economists, further gains for the pound might prove to be difficult as most of the good news has already been priced in.

Bright Outlook for the Pound might be threatened

The UK economy managed to recover after a difficult 2020, as economists grew optimistic after the successful and rapid vaccine rollouts and the easing of the lockdown restrictions. The economy is expected to expand 5% this year, something that has boosted the pound the first quarter. The reopening of the economy has been now priced in, while the sell-off in UK government bonds, pushed yields higher and supported the pound. However, economists are questioning about how much higher the pound could possibly go. Foreign exchange analysts are warning that the UK is in a more difficult position than other economies due to the fact it was severely affected by the Covid-19 crisis earlier on, despite economic momentum accelerating. Additionally, there are worries about the potential impact of Brexit, with exports and imports with the EU having fallen dramatically in January.

The pound will find support if the UK manages to continue attracting investments such as cross-border mergers and acquisitions which are a significant part of the conditions required for continued growth.

Pound sensitive to BoE Andy Haldane’s departure

News that the Bank of England Chief Economist Andy Haldane would be leaving the Bank's Monetary Policy Committee has also affected the pound. One of the reasons was that Haldane was a hawk on the MPC, supporting higher interest rates and being optimistic about the UK economy. A hawkish central bank is linked to a solid and strong currency, and as such his departure was interpreted as a crucial factor in the pound’s weakness. His views on the economy were seen as vital for boosting the pound in February.

With Haldane leaving, the MPC may now react to any forthcoming inflation risks a little later, but markets will need to wait and see who the new chief economist will be and reassess the new policy changes. For other economists, Haldane’s departure might not have a long-lasting effect on Sterling as there weren’t any plans of tightening the BoE policy in the coming months anyway.

The recent declines of the pound might also be short-lived as some economists expect the pound to continue its outperformance, particularly against the Euro.

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Sterling will continue to rise in the coming months, analysts are expecting, but they also warn a period of pause for the currency in the near term. Investors will be closely watching the release of crucial economic data this week as well as the next ones to find more evidence about the economy returning back to normality. With employment data out on Tuesday, inflation and PMI numbers out on Wednesday, and retail sales out on Friday, the current week will be a busy one.

Vaccination programme

With the vaccination rollout going smoothly and the UK being ahead of the rest of Europe, investors are waiting to see that the economy is improving. Any advances in Sterling during the coming months will be indicative of the country’s economic recovery and that the UK is exiting the pandemic in a sustainable manner due to the fast pace of the vaccine programme. Unlike the UK, Covid cases in Germany and France are rising and resulting in extended lockdown measures.

EU-UK trade deal

Also helping the pound is the renewed certainty in the government and Brexit after December’s trade deal. As economists noted, "We expect the Brexit deal will eventually reduce the uncertainty which has been weighing on especially UK businesses over many years now after the near-term adjustment to the new relationship is over. We believe Brexit has moved into the background now.” With less risks and more stability, the pound will continue to rise, however, analysts are cautioning that the currency might find it difficult to maintain its appreciation pace in the coming days and weeks. Especially, after the BoE kept a cautious tone and did not raise interest rates, despite recent positive data, markets might have already priced in the positive news and the pound might get stuck for a while. For many analysts, there is still hope, as the pound could move higher when it becomes clearer that it has exited the pandemic unscathed and strong.

In other words, the near-term pound behaviour will mostly depend on the economic data and whether there are strong numbers to boost market confidence. The coming weeks will be crucial in that regard.

UK economic data

Tomorrow, the release of UK employment data for December and inflation numbers on Wednesday will be closely watched by investors. After losing -114k jobs in November, the latest reading is expected to be disappointing indicating a loss of -170k jobs. These job losses are coming despite the extension of the furlough scheme into September.

The inflation numbers for February are expected to rise to 0.8% from 0.7% but the market will expect a higher move. A higher UK inflation number would then put pressure on the Bank of England to bring forward its rate hike plans when the economy reopens in June.

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After a dovish performance from the US Federal Reserve yesterday, investors have been waiting to see what the Bank of England thinks about the UK economy. Economists were expecting the bank to signal that it will raise interest rates, something that would help to extend the current Pound Sterling rally. However, the bank has disappointed by announcing that it will not raise interest rates until inflation is under control and has risen considerably.

The Pound has strengthened in 2021 after the bank confirmed that it won’t take interest rates into negative territory and the assumption now was for the bank to raise them and support the pound.

Bank remains cautious

However, while economic recovery and the vaccination programme have offered a positive outlook, the bank chose to maintain the current pace of quantitative easing (£4.4bn weekly) and reach its inflation target. The bank said that "The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress has been made in eliminating spare capacity and achieving the 2.0% inflation target.” After the employment fell during the pandemic the Bank expects it to recover so that rising wages start pushing inflation higher. The bank’s decision reflects a more cautious stance as it prefers to wait and see how things develop and whether inflation rises above 2.0% as employment recovers closer to pre-pandemic levels.

The pound fell as investors and traders were expecting a more hawkish tone from the bank.

Bank expectations

The Bank noted that recovery from April 2022 onwards will slow down due to the March Budget which will create a medium-term fiscal tightening. They stated that there is little hope that CPI inflation will rise above the target at the end of this year. According to Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics: "The MPC chose not to push back against the recent rise in rate expectations and gilt yields. This was never likely, given that the first rate hike isn’t fully priced-in by markets until Q1 2023; the Committee can’t make credible commitments that extend so far into the future.” Tombs added that interest rates will be raised soon as long as the markets recover. More generally, though, the Bank of England appeared to be less gloomy about unemployment and that a more resilient than expected economy will help improve the employment landscape.

BoE: signs of economic recovery

While the Bank of England’s MPC voted 9-0 to leave interest rates and QE unchanged, there are several signs that point that the economy is improving. Since the MPC’s previous meeting, the near-term economic activity had been positive. The issue now is whether companies and households will increase their spending once the lockdown ends or whether they’ll be cautious. Minutes of the meeting said that Rishi Sunak’s decision to extend the furlough until the end of September has also helped to change the outlook for the unemployment rate.

Indeed, Hugh Gimber, global market strategist at J.P. Morgan Asset Management, highlighted that the economic outlook has improved as “the Monetary Policy Committee is feeling a little more comfortable about the prospects for the economy than at its last meeting six weeks ago. The latest budget confirmed that government lifelines for the labour market will continue, the vaccine rollout is progressing at pace, and a gargantuan stimulus package across the Atlantic should have positive spillover effects across the globe. Against this backdrop, the UK economy is poised for a strong rebound this year.”

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