GBP/USD cautious ahead of fed comments

The British pound to US dollar (GBP/USD) exchange rate remains cautious ahead of today’s comments from the Federal Reserve. The stance from the Fed during the March policy meeting is likely to also determine the US dollar’s (USD) strength against other major currency competitors, particularly the euro (EUR).

At the time of writing the British pound to euro (GBP/EUR) exchange rate stands at USD 1.39, falling from recent highs of USD 1.40. Meanwhile, the US dollar (USD) is trading flat against the riskier currencies including the Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD) as the Greenback awaits today’s policy decision from the Federal Reserve. The meeting will likely grapple with rising bond yields, though it’s not expected that there will be a shift in stance.

Asmara Jamaleh, Economist at Intesa Sanpaolo believes that “the Fed will leave policy parameters unchanged, will raise its growth forecasts, and step up inflation expectations, while probably reasserting that conditions are not yet in place to work on the timeline and technicalities of starting the monetary policy normalisation process. This could result in a hiatus in the current uptrend of the dollar, but should not strip it of support, nor undermine the positive underlying trend.”

British pound (GBP) investors also remain cautious ahead of the Bank of England’s (BoE) March monetary policy meeting, which is hoped to provide support for Sterling as outlook for the UK economy grows increasingly optimistic.

Nonetheless, further downside could be possible against the euro (EUR) as post-Brexit tensions grow between the UK and EU, as several member states suspend the use of the Oxford-AstraZeneca vaccine.

At the time of writing, the British pound (GBP/EUR) exchange rate stands at EUR 1.17, with the potential to extend gains following tomorrow’s comments from the BoE and the euro (EUR) facing pressure from increasing coronavirus cases.

Coronavirus cases in Europe

Eurozone facing third wave of coronavirus infections

After a number of countries in the Eurozone have experienced a rise in coronavirus infections, Italy’s Prime Minister, Mario Draghi, recently stated ‘more than a year after the start of the health emergency, we are unfortunately facing a new wave of infections. The memory of what happened last spring is vivid, and we will do everything to prevent it from happening again.’

Italy has become one of the worst impacted EU member states for new infections this year, with new cases averaging at 12,000 per day in February, up to 20,376 on 16th March 2021.

The situation has become a major cause for concern amongst euro (EUR) investors, as many EU countries also pause the deployment of Oxford-AstraZeneca vaccines over fears that it causes blood clots. As a result, the EU continues to lag behind the UK as it’s revealed that over 24 million people in the UK have received a first dose of the vaccine.

Unlock UK Economy

GBP outlook becoming increasingly positive

Daily coronavirus cases in the UK have been on the decline this year, with 5,294 newly recorded cases on 17th March 2021, down from around 60,000 per day back in January. The current situation is also significantly more positive that the Office of National Statistic’s (ONS) revelation that approximately one in 85 people in England had COVID-19 during the first week of last November, equal to 654,000 people.

If cases continue to decline, it seems that UK Prime Minister, Boris Johnson’s lockdown exit roadmap can resume as planned, allowing the UK economy to make a sharp recovery as thousands of businesses reopen their doors on 12th April.

Following on from BoE Governor, Andrew Bailey’s comments earlier this week, it’s anticipated that Thursday’s  BoE monetary policy meeting will continue to paint a positive picture of the UK’s economic future, which will undoubtedly provide support to the British pound (GBP).

UK export to EU reduce by 40% in January

The impact of Brexit on UK trade is slowly coming to light as it recently revealed that UK exports to the EU reduced by 40% at the start of 2021. Goods exported from the UK to the EU fell by GBP 5.6 billion during January, the first month after the end of the Brexit transition period.

The ONS reports that imports also took a tumble during the same period, decreasing by over 28%. The new data marks the largest drop in trade since 1997, largely caused by post-Brexit trading rules. Stockpiling goods towards the end of 2020, before the end of the transition period, was also a likely reason for the sudden drop in January. Car imports appear to have struggled the most as well as pharmaceutical products.

Data also reveals that UK gross domestic product (GDP) also fell by 2.9% in January as a result of the UK’s third national lockdown. Whilst a drop in GDP was anticipated, the fall is less than what was expected.

Whilst Q1 was understandably difficult for the UK, Q2 is expected to be much stronger as the UK economy gradually reopens next month following the easing of coronavirus restrictions.

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