Jordan Richardson
September 16, 2021

Could the Introduction of ‘lockdown lite’ Slow GDP Growth in the UK?

Pound

Yesterday we saw sterling settle back into the low 1.17’s GBP/EUR and 1.38’s GBP/USD after a three-week high of 1.1755 and 1.3906 with sterling teetering either side of 1.17 and 1.38 on both pairings.

This week the government has delayed its post-Brexit checks on food and farming imports into the UK, measures will now come into fruition in 2022 rather than next month, as originally expected. The government has cited covid disruption and pressure on global supply chains as the reasons. The issue to global supply chains can be seen in the UK as shops are struggling to fill shelves and restaurants such as Nando’s have had a shortage of chicken across many of their restaurants. The issues with supply and demand are allowing continued robust pressure on the Bank of England with inflation rates posting the largest increase since records began. Consumer price index rose to 3.2% in August, a 1.2% rise on the previous month of July. This is the largest rise in inflation month on month since the series was introduced. These expected rises in inflation could hit 4.2% by the end of year, states Paul Dales, Capital Economics chief UK economist. This would surpass the BoE upper forecast of 4%. The pressure is on for policy makers as inflation is above predicted figures, could this be the catalyst for the Bank of England to review their stance on an interest rate hike? Governor Andrew Bailey of the BoE commented recently the minimum conditions have been met to raise interest rates. 

This week we have seen the winter plan by the UK Government published. Plan A being the roll out of booster jabs and vaccines for children. The government have also created a plan B dubbed ‘lockdown lite’ which will include the use of face coverings, covid passports and continued orders to work from home. The move to plan b will come if there is continued unsustainable pressure on the NHS. Now, 7% of hospital beds are filled with covid patients. Although a small figure, hospitals are already running at capacity and the amount of non-emergency treatment being given is already nearly a fifth down on normal levels. Current Covid hospital admissions are at about 750 a day, with winter coming, The Sage committee said its modelling suggests hospitalisations could reach 2000 – 7000 per day. The return of other usual respiratory viruses such as the flu and RSV providing the added strain on the NHS. Professor Dame Anne Johnson, President of the Academy for Medical Sciences states the current conditions are ‘ripe’ for this to happen.

The last major data release this week comes in the form of UK retail sales figures on Friday. Changes in retail sales are an indication of consumer spending. Any volatility could provide a change in sterling’s strength heading into the weekend.

Could the introduction of a ‘lockdown lite’ or even possible ‘full fat’ lockdown cause a slowdown in GDP growth moving into the upcoming Christmas period? Speak to your account manager at Lumon if you have any queries.

Euro

The euro has made up some minor ground as this current week has progressed, from Tuesday’s highs of 1.17494, we’ve seen the GBPEUR levels push below back into the high 1.16’s and stabilising around the 1.1715 mark as we finish the day’s trading. EUR/USD has continued to stay in the low 1.18 range as this week has progressed.

This week the focus will be on European Central Bank President, Christine Lagarde’s speech on Thursday. Her counterpart, Governing council member Pablo Hernandez de Cos stated today that the inflation increase in the eurozone is largely temporary. The ECB will largely monitor inflation performance. On Friday we see the release of European Consumer Price index data, the measure of price movements in consumer goods sees no change from the previous figure of 1.6%.

Investor sentiment is allowing the euro to prevent any breakout in sterling against the ‘safer haven’ currency. With market sell offs and a lower global stock market, the euro is holding firm preventing sterling from breaking above 1.175 marker.

USD

GBPUSD exchange rates have seen a return into the 1.38 region today after yesterdays high broke past 1.39. USD held sterling below 1.385 today for most of the day. The exchange rate has sat round this range throughout the weak with no clear near-term indication that rates will move either way.

As we move into the latter stages of the week, we see two important data releases come out of the States. Retail sales in August are expected to decline by 0.8%, the US Census Bureau, predicts this low reading due to decreased in momentum in spending. A decreased or lower reading could force the Federal Reserve to delay any tapering of their QE program. On Friday, the consumer sentiment index data is released, like the retail sales data, a negative or positive reading could provide some movement in USD rates. This index measures consumer mood within the population, the data allows ‘consumer exuberance’ to build a picture of spending patterns, the strength of the labour market and any potential pickups in inflation ahead.

Could these data releases provide the volatility needed to break USD out of this short-term range with sterling? If you have any questions, please contact your account manager here at Lumon.

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