British pound steady as Boris Johnson prepares new recovery plan
Pound Sterling (GBP) has gained momentum against major currency competitors during the start of 2021, as UK Prime Minister Boris Johnson reveals plan to present a lockdown exit strategy by mid-February.
The British pound to euro (GBP/EUR) exchange rate has remained stable, lingering around the EUR 1.13 level, as Sterling continues to be supported by the UK’s rapid coronavirus vaccination developments.
For similar reasons, the British pound to US dollar (GBP/USD) exchange rate is also steady, maintaining its standing at USD 1.37, though has failed to break above this resistance level in recent weeks.
Although the British pound (GBP) is currently underpinned by the impressive rollout of coronavirus vaccines, reduced economic activity during Q1 could cast a shadow over Sterling. As expected, UK flash Purchasing Managers’ Index (PMI) data for January has seen a significant decline from December, falling to 40.6 from 50.4. The drop is largely down to increased demand prior to the Brexit transition period deadline and well as the UK’s third national lockdown introduced in the new year.
The severity of the damage inflicted on the UK economy by the pandemic, caused Prime Minister Boris Johnson to emulate US President Franklin D. Roosevelt’s New Deal policies which lifted the United States out of the Great Depression.
Back in June, the Prime Minister announced a GBP 250bn recovery plan, dubbed “Project Speed” said to fast-track GBP 5bn of spending on infrastructure projects. However, seven months on, it appears that Mr Johnson’s spending pledge has failed to drive much confidence into currency markets as the British pound (GBP) remains vulnerable amid the ongoing woes of COVID-19 despite the rapid vaccine rollouts.
Mr Johnson, however, has stated that he will present a roadmap out of the current coronavirus restrictions by mid-February. It’s predicted that the plan will aim to ease the UK’s lockdown restrictions during early March, as it’s revealed that the UK is on course to vaccinate 30 million people by this point. It is likely that the UK will re-enter tier restrictions as seen towards the end of 2020, with Schools set to be the first to open.
Though UK coronavirus cases are dropping dramatically from 68,000 daily cases on 7th January, down to 20,000 on 25th January, UK Chief Medical Officer, Chris Whitty, has warned of the dangers of exiting lockdown too quickly.
Current Account Deficit Remains a Crucial Burden for Pound Sterling
The Office of National Statistics (ONS) has revealed that December 2020 saw the UK reach its highest levels of borrowing at GBP 31.4 billion, increasing the UK government’s budget deficit to GBP 271 billion, compared to GBP 212 billion in 2019. The Office for Budget Responsibility (OBR), has forecast that borrowing will increase to £394bn by the end of the financial year in March.
The current account deficit could leave the pound (GBP) exposed to downside pressure, which is increasing the single currency’s vulnerability. According to Rabobank, this dire scenario could weigh heavily on pound Sterling (GBP) with the potential to “push EUR/GBP back to the 1.00 area.”
If there is weak UK economic recovery, this also increases the risk of the Bank of England (BoE) performing a negative interest rate cut, which will likely make the pound (GBP) less appealing.
Despite the announcement of Boris Johnson’s recovery plan next month, markets appear to be cautious about buying pound Sterling (GBP) due to the extent of negative domestic pressures.
While overall trends in risk appetite and global market moves will grant the British pound (GBP), some relief, political uncertainty and weak economic data may limit any meaningful potential.
Vaccine revelations cause Pound Sterling to recover against the Australian Dollar
The British pound to Australian dollar (GBP/AUD) exchange rate has struggled over the recent months but is beginning to make progress as a result of the UK’s vaccine revelations. Currently, the pound to Australian dollar (GBP/AUD) exchange rate stands at AUD 1.79.
Despite the recent gains in the currency pairing, the UK’s lack of economic output as a result of the third lockdown appears to be limiting further progress in the British pound to Australian dollar (GBP/AUD) exchange rate.
The Australian dollar (AUD), however, has benefited from stronger than expected Consumer Price Index (CPI) data, with inflation accelerating to 0.9% during Q4 of 2020, beating estimates of 0.7%.
However, the Australian dollar (AUD) appears not to have garnered little reaction to coronavirus vaccine progressions as much it’s peers, given that Australia has seen much lower levels of infection rates over the past few weeks.
Pound gains against South African Rand
The British pound (GBP) has edged higher against the South African Rand (ZAR) as a result of overall positive market mood stemming from the UK’s advancing vaccine scheme. However, there remains pressure in the currency pairing due to the disappointing start of UK economic activity this year.
At the time of writing, the British pound to South African rand (GBP/ZAR) exchange rate is trading at ZAR 20.64. The currency pair could soon fluctuate, following a potential change in monetary policy decision from the Federal Reserve, due to be revealed later today.
While the British pound to South African rand (GBP/ZAR) exchange rate will remain volatile over the coming weeks due to the UK’s domestic issues, investors will be looking for improvements within South Africa’s production growth.
Canadian Dollar stumbles against the Pound
The Canadian dollar (CAD) has fallen against the British pound (GBP) with the British pound to Canadian dollar (GBP/CAD) exchange rate standing at CAD 1.76.
Although the Bank of Canada’s (BoC) recent policy statement revealed an overall positive outlook for Canada’s economy, there are multiple factors which could create pressure for the Loonie in the near-term.
Average weekly earnings for Canada will soon be released as well as Gross Domestic Product (GDP) figures. Underwhelming results could produce further volatility in the Canadian dollar (CAD), providing a further boost for the British pound (GBP).