COVID-19: Bank of England warns of risks to UK economy

Although Bank of England (BoE) officials stated that the UK economy would recover faster than previously estimated, pound Sterling (GBP) has slipped against a host of major trading currency rivals this week, including the US dollar (USD), Australian dollar (AUD) and the euro (EUR).

BoE Chief Economist, Andy Haldane recently stated his belief that the UK economy would experience a ‘rip-roaring recovery’, adding that people are “desperate to get their lives back, desperate to get out spending and socialising and working.”

This forecast follows previous comments from interest-rate setter Gertjan Vlieghe that some sectors of the economy might never return to pre-COVID levels.

Mr Vlieghe stated that there is a “risk that it could take years for the UK economy to return to full capacity and for inflation to hit its target rate due to the economic shock delivered by COVID-19.”

The UK’s economy suffered one of the steepest economic contractions of any other industrialised economy in Q2 of 2020, shrinking by more than 20% in the April-June period.

Although this can be widely attributed to the fact Britain’s lockdown came later than its European peers, the plunge in UK gross domestic product (GDP) highlighted the magnitude of the challenge that awaited the UK government.

However, with pubs and restaurants set to open on 12^th April, it’s thought that public spending will see a significant rise, helping the UK economy to get back on track.

The BOE’s fiscal support to the UK economy

The BoE announced last year that further quantitative easing measures would be needed to help buoy the UK economy, stating that GBP 150 billion would be injected. Whilst stimulus measures can often cause currencies to plunge, the BoE’s decision to leave interest rates unchanged, bolstered the British pound (GBP) at the time.

Although the BoE expects the UK economy to return to its pre-COVID levels from early 2022, with much still uncertain, the MPC reiterated the central bank’s willingness to take further monetary policy action if necessary.

Mr Bailey has stated previously that negative interest rates were part of the central bank’s toolbox, but that the MPC had no intention of using them and would instead look at expanding the QE programme.

The British pound (GBP) is currently stumbling against a host of its major trading rivals mainly over post-Brexit uncertainties and tensions with the EU, and economic recovery will likely ensure pound Sterling remains subdued in foreign exchange (FX) markets over the coming weeks.

Pound Sterling slips against a host of major currencies

Not only is the coronavirus pandemic weighing on the British pound’s (GBP) recent gains but also post-Brexit woes, as UK-EU tensions continue to rise.

Despite the fact that the UK is nearly four months post transition period, there are still significant delays with cross border trading, with rising speculation that the EU could abandon the Brexit trade deal, given that they are still yet to ratify the agreement.

The UK and EU reached a Brexit trade deal during Christmas Eve, after grappling with multiple crucial issues including fisheries, state aid and the so-called level playing field in contention; which intensified fears of a no-deal Brexit at the time.

Meanwhile, preliminary purchasing managers index (PMI) data for March in the UK looks to be more promising than anticipated. The composite reading shows a seven-month high of 56.6, up from 49.6 in February.

Although high beta currencies have come under fire amid a stronger US dollar (USD), GBP slipped against the riskier Australian dollar (AUD) and Norwegian krone (NOK) as well as its risk-off counterparts following the downbeat data.

At the time of writing, the pound to Australian dollar (GBP/AUD) exchange rate is trading flat at AUD 1.80, while the pound to Norwegian krone (GBP/NOK) exchange rate is edging lower at NOK 11.78.

Despite the risks in the UK’s recovery outlook, the British pound (GBP) could recover further as vaccinations look to ramp up again in April.

US dollar (USD) buoyed by positive employment data

The US dollar (USD) is edging higher against a host of major currencies this week following the passing of President Biden’s coronavirus stimulus package.

The US has suffered significantly during the course of the coronavirus pandemic, with rising unemployment being a particular concern. The American currency has since been supported by news of falling unemployment figures for February. Total nonfarm payroll figures rose by 379,000 in February, with the unemployment rate falling to 6.2%. The US dollar (USD) looks to extend gains amid positive market sentiment as a result of Biden’s stimulus measures.

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate has dipped to USD 1.36, while the euro to US dollar (EUR/USD) exchange rate is flat at USD 1.18 as covid-19 cases continue to rise in Europe.

The risk-off tone in currency markets is also ensuring that EUR/GBP remains elevated, albeit AstraZeneca vaccine tensions are contributing to the lack of momentum in the British pound to euro (GBP/EUR) exchange rate.

UK EU Tensions Rattling GBP/EUR

The British pound (GBP) has fallen sharply lower against the euro (EUR) due to a combination of factors, including tensions over the EU withholding AstraZeneca vaccines and post-Brexit trade uncertainties.

At the time of writing, the pound to euro (GBP/EUR) exchange rate is trading lower at EUR 1.16, and the currency pair will likely remain under pressure if UK-EU tensions continue to mount.

Today EU leaders will discuss how best to handle vaccine supplies and whether to continue to withhold vaccines to boost the bloc’s sluggish programme or to resume exporting to other countries.