Reading Time: 6 minutes

British pound pulls back from three-year highs against US dollar

The British pound (GBP) has lost ground against a host of major currencies this week, including the US dollar (US) and euro (EUR), having seen impressive growth over recent weeks.

In particular, the British pound (GBP) had gained ground against the US dollar (USD), with the exchange rate reaching a three year high at USD 1.41. The rally appeared to come to an end during last Friday’s trading session when the British pound to US dollar (GBP/USD) exchange rate pulled back to USD 1.39, as it continues to hover around this mark at the start of the new trading week.

Improved UK manufacturing Purchasing Managers Index (PMI) for February was not enough to underpin Sterling, as recent data reveals a rise of 55.1. The increase was a significant improvement from January’s data of 54.1 and also surpassed the flash reading of 54.9.

Despite the improved data, Rob Dobson, director at IHS Markit, highlighted that the UK was hit by substantial supply chain issues throughout February as a result of Brexit transition and COVID-19 related disruptions. “While normally a positive sign of an increasingly busy economy, the recent lengthening was far from welcome” he said. “The resultant shortages for a vast array of components and raw materials, as rising demand chased restricted supply, led to a further acceleration in input cost inflation to a four-year high.”

As the British pound is currently feeling the pressure from trade disruptions, US dollar (USD) sentiment is becoming increasingly optimistic following the passing of US President, Joe Biden’s coronavirus stimulus bill.

President Biden

The House of Representatives Pass Biden Stimulus Bill

President Biden’s USD 1.9 trillion coronavirus stimulus bill was passed by the House of Representatives last Saturday morning, with the bill now being heavily debated amongst the US Senate. Mr Biden has highlighted the urgency surrounding the bill, stating “if we act now, decisively, quickly and boldly, we can finally get ahead of this virus and can finally get our economy moving again.”

Millions of unemployed Americans will be eager for a final decision to be reached soon, given that US unemployment benefits are due to end on 14th March. Last week it was reported that US jobless claims rose to 861,000 during the previous week, as it was also confirmed that over 500,000 coronavirus related deaths had been recorded in the country.

Stringent decisions have already been made by the Senate whilst debating the coronavirus stimulus bill, as it’s reported that the proposal to raise the minimum wage in the US to USD 15 an hour has been dropped. It was stated by Senate parliamentarian, Elizabeth MacDonough, that the proposal did not coincide with budget reconciliation rules.

The changes made by the Senate means that the House of Representatives will have to agree on the amended version of the bill. However, the aim is still to get the bill on President Biden’s desk by 14th March, with the focus on providing timely support to unemployed Americans.

The US economic outlook is also improving thanks to strong manufacturing activity during February, soaring to its fastest rate in three years. Last month’s output resulted in a 60.8% reading, which is the highest level since February 2018.

Jerome Powell says US economy will need support for some time

Whilst the US’ recent manufacturing data is a step in the right direction, the Chair of the Federal Reserve, Jerome Powell, warned that the US will require extended economic support.

During his semi-annual testimony in Congress last week, Mr Powell stated that US economic recovery is far from complete. As a result, the Federal reserve will not look to change their policies for the foreseeable and until the US’ unemployment crisis shows signs of improvement.

Mr Powell commented that the US’ USD 120 billion bond buying programme and interest rate cuts has significantly financially supported the country so far, though the situation with unemployment and inflation is far from the Fed’s current goals.

As with many other countries, the US’ economic forecast is entirely dependent on the course of coronavirus and whether vaccines continue to have a positive effect. As of the 28th February, new daily coronavirus cases in the US reached 50,925, compared to over 165,000 cases a day just one month previously.

Whilst Powell noted the difficulties that the US economy is currently experiencing, he also suggested that the US could financially recover from coronavirus later on this year. “While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year” he said.

The US dollar (USD) fell against the euro (EUR) towards the end of the previous trading week, though has shown signs of recovery during today’s trading session. Currently, the euro to US dollar (EUR/USD) exchange rate stands at USD 1.20

The direction of the Greenback will continue to be driven by progressions in the coronavirus stimulus bill this week, which should hopefully encourage a turnaround in the US’ unemployment crisis over the coming months.