Pound Sterling forecasts slashed amid growing COVID concerns

• Pound Sterling (GBP) exchange rates are higher across the board
• Experts downgrade GBP forecasts as coronavirus fears grow
• British pound to Australian dollar (GBP/AUD) currency pair hits new multi-year highs
• Fluctuating oil prices offer the British pound to Canadian dollar (GBP/CAD) currency pair a boost

Several leading economists have downgraded pound Sterling (GBP) exchange rates this week. The more downbeat outlook for GBP has been triggered by a combination of growing COVID-19 fears and a disconnect between when the foreign exchange (FX) market expects the Bank of England (BoE) to hike interest rates and when the central bank plans to do so.

The British pound to US dollar (GBP/USD) exchange rate has also come under pressure in recent weeks.

Although GBP/USD is heading higher on the first day of the new trading week, the fresh downturn in the greenback exposes the currency pair to the risk of becoming trapped in a lower trading range over the coming days.

The outlook for the pound to US dollar (GBP/USD) currency pair is also hinged upon the FX market’s reading of the upcoming US Federal Reserve (Fed) monetary policy decision and pending US economic data.

While the British pound to US dollar (GBP/USD) exchange rate is trading 0.4% higher at USD 1.3817, with Cable struggling to hit June highs of USD 1.42, its short-term outlook hangs in the balance.

According to some analysts, GBP/USD is facing technical resistance between USD 1.3830 and USD 1.3912. Therefore, unless a bearish trend emerges in the greenback following the Fed decision or the release of US inflation figures, enthusiasm for GBP will likely remain stifled.

The British pound (GBP) is also being weighed down by dwindling confidence in UK economic recovery, which has induced fresh doubt into the currency market and dampened expectations for a sooner-than-expected interest rate hike from the Bank of England (BoE).

Pound Sterling suffers amid signs UK growth is stalling

Signs that the pace of recovery in Britain is proceeding more slowly has been confirmed by an onslaught of economic indicators, the most recent being IHS Markit/CIPS Composite PMI data for July.

According to IHS Markit/CIPS, the Composite PMI – which represents economic activity across the manufacturing and service sectors – was down from 62.2 in June to 57.7 in July.

The IHS Markit/CIPS Manufacturing PMI also suggested that GBP faces domestic headwinds after the printing at 60.4 in July, lower than consensus expectations of 62.7 and June’s reading of 63.9.

Meanwhile, the Services PMI read at 57.8 against the expected 62.0 consensus reading and the 62.4 reported by IHS Markit in June.

Although the regular monthly survey of UK businesses conducted by the British information provider showed that UK firms recorded solid growth in July, staff shortages and inflationary pressures have dampened recovery.

On July 19th, the UK government removed all legal limitations on social contact on mask-wearing, which economists hoped would unleash a massive wave of pent-up demand.

However, it emerged that the NHS Test and Trace app “pinged” a record 618,903 people across England and Wales in the week ending July 14th, resulting in significant staff shortages, supply disruption and crippling delays.

With the UK essentially navigating the third wave of COVID infections, consumer and business activity has understandably taken a hit, with average footfall down by more than 23% for the week in which “Freedom Day” commenced, compared to 2019.

Pantheon Macroeconomics Chief UK Economist Samuel Tombs noted that “July’s Markit/CIPS PMIs provided further evidence that the economic recovery is losing momentum.”

Although pound Sterling’s (GBP) sensitivity to global risk sentiment should offer the UK currency a boost as the world emerges from the coronavirus pandemic, this also means shifts in sentiment will have a significant impact on GBP exchange rates.

GBP/USD and GBP/EUR resilience being tested

The British pound (GBP) suffered sharp losses against the euro (EUR), Japanese yen (JPY) and the US dollar (USD) following last week’s stock market sell-off. While GBP/USD and GBP/EUR have recovered, the rapidly spreading Delta variant continues to pose a threat.

In the absence of any significant UK economic indicators for the week ahead and a data-heavy calendar period for the US, the greenback remains in the driving seat, with all eyes on Wednesday’s US Fed interest rate decision.

The decline in the euro to US dollar (EUR/USD) exchange rate has also curbed support for the British currency.

Analysts at Capital Economics expect weak UK stock market performance to deprive GBP of any additional fundamental support and send the currency lower in the medium term.

While the British pound to euro (GBP/EUR) is trading 0.2% higher at EUR 1.1701 on Monday, it appears to have found itself stuck in a consolidation range between EUR 1.1750 and EUR 1.1550.

With investors, traders, economists and consumers facing week-long waits to receive any clear information on the implications that the latest wave of COVID-19 has had on hospitalisations and deaths, it’s hard to create a clear picture of the UK’s COVID situation.

The “pingdemic” has already forced more than 1 million people across England and Wales into isolation, which Capital Economics Chief UK Economist Paul Dales said could swipe 0.5-1% off UK gross domestic product (GDP).

While this may seem like a minor economic dent, if rising coronavirus cases cause the UK government to find new reasons to reimplement curbs or COVID lockdowns, the impact on UK growth would be far more damaging.

Many economists are already warning of a potentially bumpier path for the UK economy, which has seen economists at Capital Economics downgrade forecasts for GBP/EUR from around EUR 1.21 to EUR 1.17 for 2021.

However, shifts in risk appetite should push the British pound (GBP) higher against high-beta and commodity-sensitive currencies such as the Canadian dollar (CAD), New Zealand dollar (NZD), Australian dollar (AUD) and South African rand (ZAR).

Pound Sterling (GBP) has also ticked higher against rivals amid news that the coronavirus cases in Britain have declined for the fifth successive day, buoying hopes that the crisis is levelling off in the UK.

Britain’s improving COVID situation offers GBP exchange rates a boost

Pound Sterling (GBP) has advanced against the Australian dollar (AUD), Canadian dollar (CAD) and South African rand (ZAR) on Monday after fears over the July 19th reopening saw GBP erase gains last week.

Despite warnings from scientists and health experts, Downing Street went ahead with stage four of UK Prime Minister Boris Johnson’s lockdown easing roadmap. However, since “Freedom Day”, there have been increased reports of staff shortages, supply chains disruption and COVID hospitalisations which have dampened appeal for GBP.

However, GBP made a comeback today following news that the UK infection rate is plateauing and data reports from the Confederation of British Industry (CBI).

At the time of writing, the British pound to South African rand (GBP/ZAR) exchange rate is trading 0.6% higher at ZAR 20.4757, while the British pound to Australian dollar (GBP/AUD) exchange rate has rebounded by 0.2% to AUD 1.8718.

Violent riots in South Africa have also fueled gains in GBP/ZAR after former president Jacob Zuma was imprisoned for contempt of court.

South African officials said that his imprisonment led to the worst violence the country has seen since 1994, with the death toll believed to have exceeded 330 at the time of writing.

Although the South African army managed to quell the riots on Saturday, the damage to the South African economy has already been done.

Economists at JP Morgan now expect the South African economy to contract by 3% in Q3 2021 due to the cost of repairs and rehabilitation.

Pound Sterling (GBP) is also trading higher against the Canadian dollar (CAD) due to fluctuating oil prices, which has reduced the appeal of the oil-sensitive “Loonie”.

At the time of writing, the British pound to Canadian dollar (GBP/CAD) exchange rate is trading 0.2% higher at CAD 1.7327.

However, the Canadian dollar (CAD) could stage a recovery over the coming week, with Canadian inflation data out on Wednesday and GDP figures scheduled for release on Friday.