GBP gains after furlough scheme extension and BoE pledge

The British pound (GBP) has largely reversed course in 2021 after falling sharply against the euro (EUR) and the US dollar (USD) last year due to COVID-19 and Brexit woes.

The British pound to euro (GBP/EUR) exchange rate is currently holding steady at EUR 1.17 while the British pound to US dollar (GBP/USD) exchange is trading at USD 1.39.

Pound Sterling (GBP) has been placed in a strong position thanks to UK Prime Minister Boris Johnson’s indication that non-essential businesses will reopen from next month as well as Chancellor Rishi Sunak’s announcement that the furlough scheme will be extended once again.

Bank of England will ramp up monetary policy if necessary

The Bank of England (BoE) has stated their expectations that the UK economy will see a sharp recovery in Q2 of 2021 as the economy begins to reopen from April. However, they have also confirmed that there is the capacity to increase quantitative easing measures should recovery disappoint, despite the positive economic outlook.

As it stands, the UK’s quantitative easing measures total GBP 895 billion to help support the UK during the coronavirus crisis. Deputy BoE Governor Dave Ramsden stated recently that “it remains appropriate for policy to lean strongly against downside risks to the outlook.”

It was also indicated that negative interest rates could be a possibility down the line, though this looks unlikely to take place in the near future.

The UK government has also urged the BoE to support ‘environmentally sustainable’ growth, with the aim of heading towards a zero-carbon economy by 2050. During the budget, Rishi Sunak gave the BoE a mandate to purchase ‘green bonds’ in a bid to encourage sustainability.

Mr Sunak also announced that support for businesses and workers would be extended, including the widely disputed furlough scheme, which provided further support for the British pound (GBP).

RISHI SUNAK EXTENDS THE FURLOUGH SCHEME

Last year, hours after the BoE ramped up monetary policy; Chancellor Rishi Sunak informed the UK that the furlough scheme would be extended until March-end 2021.

The scheme, which had been gradually wound down and expected to expire last October, is being extended even further to the end of September. The furlough scheme allows employees to receive 80% of their usual salary for hours not worked, capped at GBP 2,500 a month.

Mr Sunak also guaranteed GBP 2BN worth of additional funding for the UK’s devolved nations – Northern Ireland, Wales and Scotland, to provide better certainty and support for businesses and employees across the United Kingdom.

Meanwhile, self-employed workers will benefit from a fourth grant scheme covering the April – May period, which is worth 80% of average trading profits, capped at a maximum of GBP 7,500. A fifth grant will then become available for the period May – September.

However, by extending the furlough scheme and boosting other measures, some have interpreted this as an indication that the lockdown will be imposed for longer than what Boris Johnson outlined in his roadmap.

Although it is evident that firms and businesses need extra support to make it through the Spring, “for many, the furlough extension means the state of ‘suspended animation’ will continue for much longer,” says Rachael Griffin, Quilter tax expert.

The increase in government spending will also add to the country’s snowballing debt which has already exceeded GBP 200TN, which is likely to weigh on pound Sterling (GBP) sentiment.

GBP/USD outlook: uncertainty over UK/US trade deal

Throughout last year’s presidential election, the British pound to US dollar (GBP/USD) and British pound to euro (GBP/EUR) exchange rate reacted heavily during developments. Joe Biden’s win fuelled demand for the US dollar (USD) and created an overall positive market sentiment.

However, the outlook for the pound to US dollar (GBP/USD) remains uncertain as Biden’s presidency continues to cast a shadow over whether the UK can secure a trade deal with the US, given Biden’s opposition to Brexit.

Boris Johnson had recently hoped for a ‘quick trade deal’ with the US, but the President soon put the brakes on negotiations, as Chief Trade Counsel, Katherine Tai, stated that there would need to be a review of developments.

However, yesterday it was confirmed that the US would temporarily remove tariffs on a variety of goods exported from the UK to the US. The Prime Minister commented “from Scotch Whisky distillers to Stilton-makers, businesses across the UK will benefit from the US decision today to suspend tariffs in this dispute. It shows what the UK can do as an independent trading nation, striking deals that back our businesses and support free and fair trade.”

The move is undoubtedly a positive step in terms of US/UK trade, as Mr Johnson vowed to continue to build on the future of the country’s trading relationship.