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Samuel Mills
January 19, 2022

Mounting Momentum for the Pound

UK Retail Sale Post Positive Reading. Can This Continue?

Sterling continues its trend of being one of the best performing G10 currencies since the start of the year. GBP/EUR floating around 1.19 to 1.20, around pre-pandemic levels, whilst the GBP/USD, meandering between 1.35 and 1.37, is beginning to reclaim some of its 3-year high back in April last year.

Economic recovery will naturally play its part in sterling’s strength. Investment firm Goldman Sachs have predictions that UK growth could be as high as 4.8% this year which bodes very well for a country with one of the highest COVID vaccination rates globally. The pound could also be bolstered by yesterday’s positive employment figures. Tuesday saw unemployment reduce by 0.1% down to 4.1% whilst there were 50,000 less unemployment claims in comparison to the December reading. This will continue to add fuel to the fire of rising inflation however with a greater consumer confidence on economic outlook. With people looking to spend more, predictions are an inflation figure of 6% in spring! Consumer Price Index has increased to 5.4% supporting the exponential increase of the cost of living.

Discussions on how to further address rising inflation will be continued with the governor of the Bank of England, Andrew Bailey, in his meeting today. This has the ability to create volatility for the pound as 3rd February is the next interest rate decision and any suggestion that another hike is on the cards could generate a boost for the Pound. However, considering the central bank hiked rates in a shock decision last month, where it hadn’t hiked rates in a December announcement in more than 20 years, they may be looking to see the effects of the 0.25% current position before any further stimulus. Either way, this could be an important event and worth keeping an eye on.

In more good news, Scotland have announced more easing of COVID restrictions commencing next week. Nightclubs, large indoor events and social distancing restrictions will be dropped to the welcomed sound of people looking to regain some of the more social events that have been missing during tighter restrictions when the effects of the Omicron variant were still being evaluated. This will boost economic recovery in the country but many health experts will be keeping a close eye on hospitalisation rates to decide further measures later in the year.

In all things political and potentially negative for the Pound PM Johnson, as many are aware, has continuously been making news headlines for No10 breaking lockdown restrictions in 2020 and increasing calls for him to be removed from office or to “do the decent thing” and resign. Irrespective of what differing viewpoints are out there, political uncertainty and the potential for a change in cabinet and government policies may not be favourable for the sensitive Pound. Labour will be looking to leverage their position on this but time will tell as to whether this could shift the strength of a very bullish Pound.

Where Next for Euro Exchange Rates?

Comparatively, the eurozone may not have quite as positive data than the UK, but is still looking optimistic. Goldman Sachs forecasts growth at 3.9% this year which again shows positivity within the block for economic recovery. In similar inflationary news, Germany is seeing its own Consumer Price Index today which is expected to remain rangebound at a dangerously high 5.7%. Whilst the rising cost of living, matched with increasing salaries and job security is a sign that a developed country is doing well, central bankers do have to be careful that inflation does not squeeze the pockets of households too tightly. This issue has sprung up already in the UK where the cost of goods and services has increased faster than national average salaries.

European Central Bank head Christine Lagarde will likely share her views regarding the plans for this year and how to tackle increasing inflation on Friday. Considering the optimistic economic recovery, the bloc are expecting, a statement highlighting plans for a prosperous 2022 could spur the single currency to gain back some lost round against the pound and US dollar.

Could positive Global Outlook Dampen the USD?

For different reasons than the Euro and Pound, the US dollar has the ability to shift in value depending on the global economic outlook. Due to its safe-haven currency status where investors buy into it with market uncertainty or negativity, traders also sell it off in vice versa. This is a problem for the US dollar as most developed country now have very high vaccination rates against COVID-19 and even the developing countries are starting to make quick progress. With a gradual improvement in overall market conditions (a very welcomed relief for everyone) it does mean that the US could begin to lose in value this year from this aspect alone. The US dollar has already lost 2-3 cents against the Pound since the start of the year and even against the Euro, which had been making gains on the pairing consistently for the last 12 months, has lost 2 cents in the last 4 weeks.

To support its stability, the US needs to rely on economic performance this year to match the increasing market confidence it faces. Goldman Sachs also forecasted the US for a very respectable 4.1% this year and we have already seen suggestions from the Federal Reserve about the potential for multiple interest rate hikes this year. This follows on from December’s enormous 7% inflation reading and will certainly need monetary policy changes to taper this soon.

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This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).