Pound Continues Growth Against Major Currency Pairings
GBP
The Pound continued to strengthen against its major currency pairings yesterday, with GBP/EUR Interbank levels reaching the highest point in almost 2 years of 1.19838. GBP/EUR rates last broke through the 1.20 level on 18th February 2020, just before the Covid-19 pandemic was realised, and has provided clients purchasing Euros with an excellent opportunity to do so.
The number of new Covid-19 cases has been increasing each day, reaching a record high of 218,724 on Tuesday. However, Prime Minister Boris Johnson has said that he will be sticking with ‘Plan B’ as England could withstand a surge in cases without needing to shut the economy down again. This has been the main driver for the recent Sterling strength, as previous lockdowns have proved to be dire for the economy.
UK Ministers are currently finalising changes to Covid restrictions and testing requirements, after industry groups have pleaded for these to be removed. The UK government could scrap the Day 2 testing on arrival in the UK, after airlines have suggested that the testing of passengers is having no real impact but has held back recovery in the sector. Data last week suggested that 1 in 25 people had the virus. The government also confirmed that it will relax testing rules for those who take a positive lateral flow, so that they do not need to confirm this with a PCR if they have no symptoms. This rule will apply from 11th January in England.
Economic data is light this week from the UK, however Markit Services PMI (Purchasing Managers Index) will be released this morning and is expected to remain at 53.2 in December, the same as November’s reading. Construction PMI data will follow this on Friday morning which is expected to fall slightly to 54.
EUR
The Euro has continued its struggle against the Pound and US Dollar this week, as the Omicron variant has been spreading rapidly across Europe, causing governments to reinstate restrictions to contain infection levels. This includes Germany which is Europe’s largest economy, now considering further restrictions on social contact. Yesterday’s Markit composite PMI release fell from 55.4 in November to 53.3 in December, the lowest level since March. The figure for Germany also disappointed, falling from 50 to 49.9, with a reading below 50 signalling contraction.
In France, a debate on new Covid-19 restrictions has been suspended after opposition lawmakers insisted on an explanation from French President Emmanuel Macron, after he reportedly made unsavoury comments aimed at the unvaccinated population. As 90% of France’s population are now vaccinated, this has been viewed as a tactic to swaying voters with the presidential election coming up in April.
Preliminary German Consumer Price Index figures will be released this afternoon for December, with year on year figures expected to fall from 6% to 5.7%. As high inflation levels are impacting economies globally, this release is likely to be keenly watched for by investors, and we could see EUR volatility as a result of this announcement.
USD
The US Dollar strengthened yesterday against the Euro following a flurry of positive economic data releases from the US. ADP released its latest Employment change data for December, which surprised markets which had been predicting an increase in the number of employed people of 400k, however December’s reading came in at 807k. This was followed by Markit Services PMI data coming in slightly higher than expectation at 57.6, and PMI composite at 57 compared to 56.9 in November.
Last night, the Federal Open Market Committee released its latest minutes following its December interest rate meeting. The Federal Reserve announced its plans to taper the amount of bonds held, almost $8.3 trillion worth, which will begin some time after the central bank begins raising interest rates. While no exact date has been mentioned, statements from the meeting indicated that this could begin in 2022, potentially in the next several months. Forecasts are that there is a 2:1 chance of the first hike coming in March, with analysts expecting the next could be in June or July, and then a third hike in November or December. The moves from central bank are in response to inflation, which is higher than had been anticipated, rising at the fastest pace in 40 years.
This afternoon Trade Balance, Initial and Continuing jobless claims, and ISM Services PMI will be released. The Services PMI is expected to fall from 69.1 in November to 66.9 in December, so we could see some volatility for USD exchange rates tomorrow afternoon.
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