A Guide to Currencies in 2021

The coronavirus pandemic made 2020 one of the most turbulent years in recent history, with global economic activity down 5% from 2019. Following the immense financial devastation, the end of 2020 saw the light at the end of the tunnel as COVID-19 vaccines began to get rolled out.

Now, at the beginning of 2021, the UK, in particular, is administering vaccines at an impressive rate, paving the way for an imminent economic recovery.

Although COVID-19 vaccines have placed nations back on the road towards normality, the question is, how strong will economies recover in 2021?

According to the International Monetary Fund (IMF), projections for global economic growth for 2021 and 2022 are as follows:

UK economic outlook 2021

Following a 10.5% drop in economic output during 2020, the UK is expected to experience a sharp rebound in 2021. The UK services sector is set to see a particularly dramatic rise following a devastating year. Hospitality, travel and tourism have all suffered significantly due to coronavirus lockdown restrictions, with UK services Purchase Managers Index (PMI) falling to a record low of 13.40 in April 2020.

Following December’s Brexit trade deal, recent improvements in the British pound to euro (GBP/EUR) and the British pound to US dollar (GBP/USD) exchange rates, have led economists to believe that Brexit is no longer a primary driver in UK currency developments.

That being said, there remains confusion regarding post-Brexit trade requirements between the UK and EU, which caused multiple companies to suspend cross border trading in January. Additionally, the UK is in the process of agreeing a post-Brexit financial services deal with the EU, allowing the UK to access the EU market. Whilst Brexit may no longer be a primary driver for the British pound (GBP); evidently, there remain issues that need to be addressed, which will weigh on Sterling in the near-term.

The UK labour market showed signs of resilience in 2020, with manufacturing PMI hitting a three year high in December 2020 at 57.5. However, the high growth levels were attributed to surges in EU customer orders, looking to stockpile before the Brexit transition period. As a result, the UK will likely experience a sharp contraction in January.

Dwindling output due to post-Brexit confusion, coupled with coronavirus lockdown restrictions, has led currency analysts to believe that the UK economy will contract by 2.5% during Q1 of 2021. Though it seems 2021 will be a slow start for the UK, continued vaccine developments and the gradual easing of coronavirus lockdown restrictions should pave the way for a more robust Q2.

US economic outlook 2021

The United States was heavily impacted by COVID-19, with the highest infection rates than anywhere else in the world. Despite worryingly high coronavirus cases, the US’ economy only contracted by 5% in 2021 compared to 8% in the Eurozone.

The US election build-up caused rapid fluctuations in the US dollar (USD), with new President Joe Biden facing significantly high US unemployment levels. Over 10 million Americans are currently unemployed, with over 140,000 jobs lost in December 2020 alone. President Biden has already confirmed that unemployment benefits will increase from USD 300 to USD 400 in addition to a USD 1.9 trillion coronavirus stimulus package.

The IMF increased its 2021 economic forecast for the US to 5.1%, up 2% from October’s prediction. It’s thought that continued coronavirus vaccines rollouts teamed with President Biden’s policy actions will help to accelerate US economic recovery this year.

Eurozone economic outlook 2021

Forecasts for economic recovery in the Eurozone seems to mirror that of the UK in that financial progress will be subdued during Q1. As imagined, January saw composite PMI fall from 49.1 in December, down to 47.5.

Rising concerns regarding the COVID-19 variant have caused multiple countries in the Eurozone to tighten coronavirus restrictions. The Netherlands and France have each imposed a curfew, with France tightening their existing one to 6 pm as Germany confirmed that they would extend their current lockdown to the middle of February. The lockdown extension has caused Germany’s consumer confidence figures for February to plummet to -15.6, down from -7.5 in January.

Whilst the UK and US have administered COVID-19 vaccines at a rapid rate, developments within the Eurozone have been much slower. The EU has aimed to vaccinate 70% of its population by the summer, yet insufficient vaccine supplies are set to threaten their target. So far, the EU has vaccinated approximately 8 million people compared to over 10 million in the UK.

Although the Eurozone will likely see a robust economic recovery, it’s thought that slowed vaccine developments could delay significant economic progressions until 2022.

China economic outlook 2021

Whilst coronavirus originated in China; the country seems to have been most successful in curtailing further outbreaks and entered 2021 in a much stronger position than other economies. It was mainly industrial production which encouraged a strong economic rebound, seeing a rise of 2.8% compared to 2019. Data has also shown that exports reached a record high in December 2020, with 18.1% growth year on year.

However, with Donald Trump now out of office, the focus is placed on the future of US-China relations. December 2020 saw a narrowing of China trade surplus with the US, declining to USD 29.92 from USD 37.42 in November. 2018 saw Donald Trump enter a bitter trade war with China and, whilst President Biden will aim to be more co-operative, it’s thought that he too will take a firm stance when it comes to future trade negotiations.

Although China is on track for a substantial economic recovery in 2021, there remain bottlenecks which could delay progressions. There are currently issues at China’s ports, including lack of containers and raw materials, which could hinder progress in the movement of goods this year.

Update on COVID-19 vaccine developments

The rollout of COVID-19 vaccines, which began during late 2020, have supported a more optimistic outlook on global currency markets. December 2020 saw the Pfizer vaccine rollout in the UK, followed by the Oxford-AstraZeneca vaccine in January 2021. UK Health Secretary, Matt Hancock, stated that the Moderna vaccine is likely to be administered in the spring and the new Valneva vaccine to roll out in the summer. The UK is on target to achieve its aim of vaccinating 15 million citizens by summer 2021 in a bid to reach herd immunity.

Although the rapid rollout of the coronavirus vaccine is positive, there remains significant uncertainty on how this will impact currency markets in the long term. It is still unknown exactly how long each of the vaccines will be effective, possibly that they could only offer protection for nine months. It is also uncertain as to the vaccines’ effectiveness against the new variants of COVID-19. For now, at least, the UK seems to be on track for a gradual return to normality by summer 2021.

Monetary policies for 2021

It’s been a significant concern that central banks will implement negative interest rates in 2021. Whilst this action has yet to be confirmed by major economies, it is unlikely that this will be on the agenda for the foreseeable future. This decision primarily comes down to observations of economies who have deployed negative interest rates in the past, such as Japan and Sweden. Neither of these economies appeared to have significantly benefited or outperformed their peers due to such action.

US

The Federal Reserve is predicted to add to its asset purchase programme this year, buying at least USD 120 billion of bonds a month and has confirmed its commitment to keep interest rates near zero. The Fed stated its belief that the US economic future depends significantly on the course of COVID-19 and the progress of vaccinations.

Eurozone

The European Central Bank (ECB) has hinted at negative interest rates during the beginning of 2021 in a bid to maintain stability in the euro (EUR), aiming for inflation rates of close to but below 2%.

UK

Bank of England Governor (BoE), Andrew Bailey, has already stated in recent weeks that the BoE is unlikely to deploy negative interest rates for the time being and forecast that the UK economy will experience a sharp economic recovery this year.

Currency markets 2021 overview

It’s difficult to forecast precisely how the economic situation will look at the end of 2021, given the uncertainty of the vaccines’ effectiveness. However, the global economy’s general outlook in 2021 is significantly more optimistic than the previous year. COVID-19 vaccines have mostly helped generate support for overall economic growth, with Asia mainly set to see high output levels this year. It will be a slow start for the UK and Eurozone during Q1, and rapid vaccine rollouts will support a stronger Q2 and beyond.

To discover more about how Halo Financial can help manage your currency risk in 2021, please give us a call on 020 7350 5474.