• British pound (GBP) driven by optimism following UK Services PMI data
  • US dollar (USD) loses its appeal following disappointing labour market data
  • Japanese yen (JPY) advances amid cautious sentiment
  • Australian and New Zealand dollars make modest gains following an overnight slump

Pound Sterling (GBP) is storming higher against a host of major currencies ahead of the weekend and is tipped to continue advancing against trading rivals such as the euro (EUR) due to the UK’s vaccine-induced COVID recovery.

According to the latest GOV.uk vaccination statistics, more than 66M coronavirus vaccines have been administered in the UK. As of June 2nd, in Britain, 75% of all UK adults had received one dose of a COVID vaccine, while more than 50% of the adult population is fully vaccinated.

Today, it also emerged that the Medicines and Healthcare products Regulatory Agency (MHRA) had approved the Pfizer/BioNTech vaccine for 12 to 15-year-olds, meaning children could soon be offered vaccines in Britain.

It comes after scientists warn that the UK is in the “early stages of a third COVID wave” due to the growing spread of the Indian variant, formally known as B.1.617.2.

Suppose the UK ramps up its coronavirus vaccination programme. In that case, this could lead to further gains for pound Sterling (GBP) which has extended Thursday’s advances against the US dollar (USD) and other major currencies.

Heading into the North American session, the British pound to US dollar (GBP/USD) exchange rate is trading 0.6% higher at USD 1.4198.

Given that US Nonfarm Payrolls data disappointed investors, we could see GBP/USD consolidate above the USD 1.42 level during the remainder of Friday’s session.

While GBP is taking advantage of USD weakness, pound Sterling (GBP) has also been driven higher by Thursday’s release of UK service sector data which rose to its highest level in seven years.

However, the British pound (GBP) remains exposed to downside risk as the rapidly spreading Indian COVID variant threatens to derail the UK government’s reopening timetable.

Although the number of hospitalisations and deaths in the country have not substantially increased due to the lack of data on the coronavirus mutation, experts are concerned that the highly transmissible strain could be resistant to vaccines.

After a sustained rise in the number of hospital cases last week, data from the NHS revealed that the number of coronavirus hospitalisation dropped significantly in the past 24 hours. Furthermore, with more than 50% of the adult population fully vaccinated, this is expected to provide strong protection against the Indian variant.

Some foreign exchange (FX) analysts have also noted that as the vast majority of UK businesses have reopened, even if ministers delayed the June 21st unlocking, this would have a minimal impact on GBP and the broader UK economic narrative.

Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets in London, highlighted: “Credit and debit card spending data has already reached 96% of the average level seen in February 2020.” 

So, for our readers watching pound Sterling (GBP) exchange rates, while the UK currency may come under some pressure if the June 21st roadmap date is pushed back, losses should be marginal.

For those watching the US dollar (USD), economic data will continue to be of primary importance for the US currency, which has slumped following May’s labour report.

Greenback heads lower following disappointing US jobs data

The US dollar (USD) clawed back some of its losses against the British pound (GBP) and the euro (EUR) during Thursday’s trading session, buoyed by reports showing that the US economy has gone from strength-to-strength in recent months.

According to the ADP National Economic Report, the US private sector added 978,000 jobs in May, fuelled by the reopening of consumer-led businesses and widespread vaccination.

The high-impacting data offered the greenback a lifeline against currencies such as the Canadian dollar (CAD) and British pound (GBP), which attempted to push towards multi-year highs against USD on Thursday.

However, today’s release of US Nonfarm Payrolls data has sent the greenback tumbling in currency markets.

FX market participants had expected the reading to support the US dollar (USD) and prompt the US Federal Reserve (Fed) to consider tightening policy measures in the coming months.

While there was a noticeable improvement in the employment rate, the figure fell short of expectations. Economists had expected 671,000 jobs to be added to the US workforce and the unemployment rate to decline to 5.9% in May.

Although the US unemployment rate fell to 5.8%, with the pick-up in economic activity boosting hiring – employers only added 559,000 jobs to the workforce in May.

Given that the Fed operates a policy of aiding the labour market while managing inflation, hopes for an interest rate hike are fading, weighing USD.

The US dollar (USD) has slumped against a host of its trading partners, including the less risky Japanese yen (JPY).

At the time of writing, the US dollar to Japanese yen (USD/JPY) exchange rate has tumbled by 0.7% to JPY 109.5185, and further weakness could be in store for the currency pair in the long term.

US dollar expected to weaken further throughout 2021

Economists at MUFG bank expect the US dollar (USD) to weaken further against the Japanese yen (JPY) in the long term due to the country’s unprecedented trade deficits and weakness in long-term UST yields.

Although the solid economic rebound in the United States could support the greenback, as momentum for the normalisation of monetary policy increases and increased consumer spending fades, MUFG believes that USD depreciation will outpace JPY.

The Japanese yen (JPY) has also been trading lower in recent months due to Japan’s comparatively slower COVID-19 vaccination campaign, with only 3% of the population fully inoculated.

However, the slow COVID vaccine rollout in Japan also poses downside risks to Japan’s economy, which is already shrinking in the absence of tourists.

Japan’s Q2 growth forecasts have also been cut sharply, with the economy expected to recover at a far slower pace in the three months to June due to extended emergency COVID measures stemming from a surge in new variants.

And yet, despite growth revisions, the British pound to Japanese yen (GBP/JPY) exchange rate has struggled to gain traction on Friday.

GBP/JPY has slumped by 0.3% to JPY 155.045 heading into New York trading hours, most likely due to a shift in sentiment triggered by disappointing US labour market data.

The cautious mood has been worsened by tax hike proposals from US President Joe Biden, increased reports of Indian variant caseloads and the commencement of the all-important G7 meeting in London.

The risk-off mood is further reflected in pound Sterling’s (GBP) performance against the Canadian dollar (CAD).

New Zealand dollar currency (2)

Safe-haven bounce boosts risk-off currencies

The British pound to Canadian dollar (GBP/CAD) exchange rate is trading 0.3% higher at CAD 1.7133, heading into the North American session.

Although positive PMI figures for May offered GBP/CAD a boost, the currency pair has also been supported by the increasingly cautious market mood.

The “Loonie” has begun returning its 2021 gains to some of its major trading rivals, which saw GBP/CAD reclaim more than 1% over the last month.

Besides rising oil prices, central to support for the Canadian dollar (CAD) have been comments from the Bank of Canada (BoC) about tapering its stimulus programme and performing an interest rate hike in 2022.

However, analysts have said that most of this news is more than likely already priced into CAD exchange rates, so any further gains in the “Loonie” will depend on Canadian economic indicators, vaccine data and oil prices.

CIBC expects the Canadian dollar (CAD) to weaken against a host of trading counterparts by the end of the year as oil prices decline and the Fed adopts a more hawkish stance.

Although investors are becoming increasingly cautious, the Australian and New Zealand dollars are outperforming in currency markets.

At the time of writing, the British pound to Australian dollar (GBP/AUD) exchange rate is trading 0.5% lower at AUD 1.83, while the British pound to New Zealand dollar (GBP/NZD) currency pair has slipped by 0.3% to NZD 1.9676.

The Australian dollar (AUD) and New Zealand dollar (NZD) plunged following the release of the stronger-than-expected US private-sector jobs report, which ramped up demand for the safe-haven greenback.

However, both currencies are gaining traction now that the US currency is tumbling. Although new variants pose downside risk, AUD and NZD could extend gains as we see noise about inflation amplify as higher prices benefit commodities.

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