Pound Sterling’s in recovery mode but vulnerability lingers

• Pound Sterling (GBP) stages a recovery across the board
• Riskier assets edge higher amid broad-based US dollar (USD) weakness
• European Central Bank (ECB) meets “dovish” expectations and sends single currency under pressure
• Australian dollar (AUD) is poised for further losses due to several negative drivers

Pound Sterling (GBP) has rebounded across the board during  Thursday’s trading hours, recouping lost ground against a host of major currencies, including the US dollar (USD), euro (EUR), Canadian dollar (CAD) and Japanese yen (JPY).

Gains have been aided by the overall improvement in global risk sentiment, news that the UK government borrowing declined by GBP 5.5BN in June and signs that the UK’s COVID growth rate is slowing.

Although COVID cases in the UK are on the rise in both vaccinated and unvaccinated people, Britain recorded 44,104 new positive cases on Wednesday, slightly higher than the 42,302 recorded the same day the previous week, suggesting that caseload growth is beginning to slow.

The week-on-week deceleration that experts have identified has also boosted hopes that a downward trend may be emerging, and the infection rate will begin to plateau in the coming weeks.

Although inflation concerns and renewed Brexit tensions could limit upside potential in GBP, investors appear to be overlooking these issues for the time being.

Furthermore, areas that had witnessed exponential growth, such as Scotland and Newcastle and Sunderland in England, have reported fewer daily cases. The rest of the country is expected to follow suit over the coming weeks.

The data has renewed confidence in the UK’s recovery outlook and, in turn, lifted pound Sterling (GBP) exchange rates higher.

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.3% higher at USD 1.3758, while the British pound to euro (GBP/EUR) currency pair is eyeing the EUR 1.17 level.

Still, Britain’s “big four” supermarkets – Tesco, ASDA, Sainsbury’s and Morrisons – are reporting significant challenges amid the uptick in COVID-19 cases.

UK retailers face challenges amid rising coronavirus cases

UK supermarkets have announced staff shortages due to large numbers of in-store employees and delivery drivers self-isolating after being near someone carrying the virus.

The Director of Food and Sustainability at the British Retail Consortium (BRC) Andrew Opie said that Britain’s “pingdemic” – which is a play on words referring to notifications sent to those testing positive via the NHS COVID app – has ramped up pressure on UK retailers.

Mr Opie added: “Urgent government intervention is needed as UK supermarkets are struggling to maintain opening hours and keep shelves stocked.”

Widespread staff shortages are expected to negatively impact retail sales data for July.

Britain’s rising infection rate has already caused a significant number of people to self-isolate after being pinged by the NHS for being near someone that’s tested positive for COVID.

Recent economic indicators have already shown that Britain’s economic rebound is slowing in pace, with the spike in the infection rate said to be dampening consumer confidence.

Consumer spending growth has eased from recent peaks and will likely remain subdued until the infection rate follows a downward trajectory.

Nonetheless, global investor sentiment developments have overshadowed UK COVID concerns and created a positive trading environment for pound Sterling (GBP).

The euro (EUR) has also suffered in the wake of the latest European Central Bank (ECB) policy statement, which sent the single currency just off three-and-a-half-month lows against the greenback.

ECB policy meeting drags euro (EUR) lower

The ECB met investor expectations, pledging to keep interest rates near record lows until the Eurozone inflation rate hit the central bank’s 2% target.

The dovish policy statement, which comes when other central banks are considering tightening stimulus, weighed heavily on EUR, which is trading lower against the majority of its major trading partners.

Pound Sterling (GBP) has advanced by 0.38% on the day, while the euro to US dollar (EUR/USD) exchange rate is flat at USD 1.179.

Investors are now looking ahead to ECB President Christine Lagarde’s speech on Friday, but given that rate hike expectations have already been excluded from the strategy, her comments will likely do little to help EUR exchange rates.

The improved global investor sentiment is also helping stocks and commodity currencies, such as the Canadian dollar (CAD), New Zealand dollar (NZD) and Australian dollar (AUD).

Canadian dollar reclaims recent losses amid broad-based US dollar weakness

The Canadian dollar (CAD) has maintained Wednesday’s overnight gains, supported by the positive shift in risk appetite and a recovery in oil prices.

Wall Street’s S&P 500 Index is up by 4.87 points or 0.11% to 4,363.56  at the time of writing, while WTI crude oil prices have rebounded by more than 0.5% to USD 70.68 a barrel.

Although the spike in global COVID-19 cases, fuelled by the more transmissible Delta variant, remains a cause for concern, fears are fading amid signs that coronavirus vaccines reduce the risk of severe symptoms, hospitalisation and death.

People that are fully vaccinated are also relatively well-protected, and with more than 50% of Canadian adults double jabbed, this is offering the “Loonie” support.

Domestic data is also keeping CAD elevated on Thursday, with the Teranet-National Bank (TNB) Composite House Price Index rising by 2.7% month-on-month in June.

Canadian retail sales data due on Friday could also offer support by offering clues about the state of the Canadian economy. If the figures reveal significant growth, this could raise expectations for a rate hike from the Bank of Canada (BoC), which has been relatively optimistic about Canada’s recovery outlook in recent policy meetings.

Positive price action around the Canadian dollar (CAD) has also been triggered by renewed weakness in the greenback, which had entered its seventh consecutive week of appreciation on July 19th.

The softening of the US dollar (USD) has aided gains in other commodity-linked currencies, including the Australian dollar (AUD), albeit sentiment towards the “Aussie” appears to have flipped from bullish to bearish this month.

Australian dollar forecasts cut for this summer

Pound Sterling (GBP) has gone higher across the board against most G10 rivals besides the Norwegian krone (NOK) and the Australian dollar (AUD), albeit the latter is poised for significant weakness in the medium term.

After being one of the first countries to almost eliminate the coronavirus, fresh lockdowns in the Australian states of Victoria and New South Wales have raised concerns over the outlook of the Australian economy.

The COVID lockdowns could force the Reserve Bank of Australia (RBA) to rethink its tapering decision and increase its government bond-buying programme.

Other negative drivers have come to the fore, including Australia’s slow coronavirus vaccination campaign, the unwinding of the commodity rally and weaker-than-expected economic data.

AUD suffered a hit earlier today after flash Australian retail sales data for June disappointed, coming in at -1.8% after rising by 0.4% in May.

Although COVID lockdown easing should trigger a solid economic rebound, the outlook for Q3 2021 was dampened by some analysts, who said that the reintroduction of coronavirus lockdown measures would inevitably damage the economy.

Growth projections for the third quarter of the year have been revised from 4.8% to 4.4%. While this may seem like a minor economic dent, given that other advanced economies are at the stage where they are reopening the economy, this will more than likely drag AUD lower.

In addition, the rapid spread of the Delta variant in Asia, more specifically China, which is Australia’s largest trading partner, could give the RBA more reason to maintain its ultra-dovish monetary policy.

At the time of writing, the British pound to Australian dollar (GBP/AUD) exchange rate is trading flat at AUD 1.8654. However, concerns over the outlook for the Australian economy and RBA uncertainty could see GBP/AUD target the AUD 1.89 level in the coming months.