Once again, the pound advanced against both the dollar and euro by 1% and 1.1% respectively. The only G10 currency the pound failed to make gains against was the Australian dollar but only by 0.2% as the power of the vaccine success continued to push sterling higher. The UK economy looks set to make strong rebound in Q2 especially compared to its European counterparts who are falling behind in the vaccination race. GBP/USD crossed the major psychological level of 1.40 on Friday as UK Services PMI performed strongly at 49.7 compared to expectations of 41.
The pound now finds itself in precarious position of being over valued versus the euro and in danger of falling back below 1.40 against the dollar. Traders will be watching the Fed next week to see if Powell delivers a cautious message on Tuesday that won’t increase expectations of imminent QE tapering, If this is the case the pound should continue to climb versus the dollar and could start eyeing 1.45. Closer to home, Boris Johnson is announcing the road map out of lockdown and the reopening of the economy. Though the message is expected to be cautious with no formal end date set, the fact that the UK is moving towards such a roadmap underscores the constructive outlook of sterling for the coming months, particularly vs Europe. Data wise, the jobs report is released on Tuesday morning which is expected to show a small increase in unemployment to 5.1%.
The dollar continued to slide against most of its peers and inflationary pressures continue to mount with the dual forces of current monetary policy and the purposed fiscal stimulus. Though versus the euro there was no movement as investors struggle to find reason to back either currency. The 1.20 level for EUR/USD managed to stay intact as GBP strengthened by more than 1% against the euro causing downward pressure on the trade-weighted exchange rate. In terms of data, last week saw positive gains in retail sales at 5.3% versus expectations of 1.1%. The cold snap and energy crisis in Texas has yet to affect the dollar but this may change if it is not rectified soon.
This week should see some progress on the US$1.9trn fiscal stimulus bill, where a vote could go to the House floor on Friday. The inflationary pressure of the stimulus bill twinned with the loose stance of Fed policy is expected to continue to cause a dollar sell off. Though if Powell and the Fed start to sound hawkish or even shorter term with their current stance on policy then the dollar could start to stage a fight back. US data in this week should be a modest upward revision to the 4Q20 GDP figure and positive January personal income numbers. This is expected to jump off the back of stimulus cheques though this should already be priced into the market.
The single currency continues to slide against the pound as the EU’s vaccination program fails to impress investors compared to other developed nations. This is proven by the latest figures showing only 6 vaccinated per 100 people in the EU versus 18.5 in the US and 26 in the UK. Though with the announcement of a fresh vaccine deal with Moderna the tables may start to turn and with it the euro is expected to regain some ground especially against the pound. Mario Draghi easily won the backing of senate as almost all Italy’s political parties supported him in his new role. His first task is to draw up a reform plan in order to unlock the more than €200bn in EU covid-recovery money.
The euro could enjoy some strength straight of the bat versus the dollar if the German February Ifo number surprises on the upside. This would show that the EU biggest economy Germany is weathering the lockdown slightly better than expected. Monday continues to be a big day for the euro as Christine Lagarde will also be speaking. The recent weakness in EUR/USD has seemed to have calmed the ECB down a little and the euro did not feature prominently in the January ECB minutes. Assuming commodities stay strong across the board, and sterling stays supported too, the euro could manage to inch higher over the next month.
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