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How are Coronavirus recovery plans affecting currency exchange rates?

The early stages of COVID-19 experienced during 2020, saw the global economy stall, as rates of infection surged and thousands of businesses were forced to close. However, with 2021 well underway, it makes sense that Coronavirus recovery plans and preparations for a reopening of parts of each domestic economy would be a driving force for currency recovery as well.

New Zealand is a prime example, with all lockdown restrictions now lifted and infection rates down to nearly zero. It was no surprise that the New Zealand dollar (NZD) strengthened overnight when the New Zealand Prime Minister announced one more week of lockdown and proposed plans to reopen parts of the economy. Jacinda Ardern spoke of New Zealand’s remarkable low infection rates and lauded the fact that New Zealand averted the worst of coronavirus and “stopped a wave of devastation”. The New Zealand dollar (NZD) has continued to dominate the British pound as a result, with the current British pound to New Zealand dollar (GBP/NZD) exchange rate standing at NZD 1.90.

However, the UK’s economic outlook has strengthened over recent weeks, seeing gains against some of its major currency competitors, including the euro (EUR) and US dollar (USD). The UK has been administering coronavirus vaccines at an incredibly rapid rate, with a portfolio of jabs now available. More than 12 million people in the UK have received the first dose of the coronavirus vaccine as it’s hoped that UK lockdown restrictions can be eased by the summer.

Novel coronavirus disease COVID-19 written on blue folder.

Recovery plans starting to affect currencies and exchange rates

GBP/USD

That same desire of recovery plans to see an end to the economic paralysis is driving other currencies. The US dollar (USD) was given a significant boost following US President Joe Biden’s inauguration and his announcement of a USD 1.9 trillion stimulus package. The news had a knock-on effect, with a host of other currencies also benefiting from the announcement.

The stimulus package is currently being discussed in congress as it’s hoped that the plan will stimulate employment growth, with rates returning to a normal level next year.

The British pound to US dollar (GBP/USD) exchange rate is currently standing at USD 1.37, having plunged to USD 1.16 during March 2020. UK Prime Minister, Boris Johnson, is set to reveal a road map this month for how the UK will gradually exit lockdown. The UK’s vaccine developments, teamed with the Prime Minister’s imminent exit strategy, is providing a much more positive outlook for the British pound (GBP) as the UK enters the road to economic recovery.

GBP/EUR

The British pound to euro (GBP/EUR) exchange rate is also experiencing signs of improvement, thanks to the UK’s swift vaccine response. The British pound to euro (GBP/EUR) exchange rate is currently EUR 1.14, having plummeted to EUR 1.06 during March 2020.

COVID-19 infection rates in the Eurozone began to increase towards the end of 2020. Germany, the largest economy within the Eurozone, are reported to be extending its national lockdown to the end of February. Though infection rates have been falling, Germany’s Economy Minister, Peter Altmaier, stated that it would not be responsible to relax the rules at this stage with the potential to trigger a third wave of coronavirus.

Chancellor of Germany, Angela Merkel, is set to hold a virtual meeting on 15th February to discuss the current COVID-19 restrictions in place. A lockdown extension could potentially knock the euro (EUR) with businesses forced to close for longer than expected, limiting retail and hospitality sales.

GBP/AUD

Whilst the British pound (GBP) has fared well against many of its major currency rivals, Sterling has begun the week trading lower against the Australian dollar (AUD), with the currency pairing frequently fluctuating throughout the pandemic.

The British pound to Australian dollar (GBP/AUD) exchange rate reached a two-month high last week at AUD 1.80 following dovish comments from the Reserve Bank Australia (RBA) as the Bank of England (BoE) spoke of tightening UK monetary policy. This week saw the British pound to Australian dollar (GBP/AUD) exchange rate open at AUD 1.78, leaving investors wondering if the currency pairing has run out of steam.

The British pound (GBP) could be further impacted this week as UK gross domestic product (GDP) for Q4 is set to be revealed. Negative data could knock Sterling confidence, causing a further dip against the Australian dollar (AUD).

Bank Of England. (City of London)

Bank Of England. (City of London)

Latest comments from The Bank of England

Last Thursday saw the Bank of England’s monetary policy committee vow to leave interest rates at 0.10% and preserve quantitative easing measures at GBP 896 billion. Though the BoE has told banks to ‘prepare’ for negative interest rates for later on this year, it currently seems unlikely that this will be the case.

Whilst the bank stated that the UK economy is forecast to shrink by 4.2% during Q1 of 2021, the BoE has also commented that the UK will ‘recover rapidly’ as a result of the impressive vaccination rates. Andrew Bailey, the governor of the Bank of England stated “we do think that that is going to support a sustained recovery throughout the rest of the year”.

Currencies are expected to be volatile in the following days as UK Prime Minister Boris Johnson reveals his full coronavirus recovery plans. The announcements could affect your currency trading. Contact our currency experts to make sure you get the best value for your money.

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