STEVE EAKINS
August 11, 2021

HOW A FUTURE LOCKDOWN COULD EFFECT THE ECONOMY?

Will any further gain against GBP be worth the risk following Sterling’s recent climb to an 18-month high?

As of this week, the UK has administered 47m first vaccine doses and 39.4m second vaccine doses, up by 0.2m and 1.1m from the prior week. Per 100 this means the UK has given 127 doses, the US is at 105, Germany 113, and France 113.

Even though the narrative around Covid seems to be changing in the mainstream media, the potential risk for the future output of any economy – if we were to go back into lockdown – is high. As a result, many are watching the number of infections and vaccination as a driving factor for the value of a currency.

Two main components likely make up these gains

Many people are watching the number of infections and vaccination as a driving factor for the value of a currency. The UK recorded 191,019 COVID-19 cases in the seven days to 8 August, an increase of 1.9% on the previous week. Hospitalisations numbers in the week to 3 August were 5,328, down 16% on the previous week. The theme around a ‘pingdemic’ has also evolved following a change in the NHS Covid-19 app. In the week to July 28th July, the number of people told to self-isolate fell by 43%.

Another sign of a post covid environment is the opening of easier travel from the UK to other countries without the need to isolate on return. The list of the countries where people can now travel too without isolating, on the basis that they have a qualifying double vaccination, grew this last week to include France, Austria, Germany, Latvia, Norway, Romania, Slovakia and Slovenia.

Economically the latest update from the Bank of England (BOE) suggested a higher level of Inflation in the future. The BOE now expects inflation to reach 4% at the end of the year, up from 2.5% in its May forecast. They also went on to suggest that it thought UK unemployment had peaked.

The BOE said that “some modest tightening of monetary policy is likely to be necessary” within the next two years to control inflation as it voted to keep interest rates and its asset purchase program unchanged. This is much sooner than many other central banks and it is this expectation that has increased demand for the UK Pound and therefore its value.

GBPEUR levels now sit at the highest level seen since February 2020, 3 cents higher than just 2 months ago in May, meaning that a €200,000 purchase now costs nearly £4,000 less.

We also have seen new policies from the UK government announced recently including a new scheme of £750m to provide insurance for live events against government-forced cancellation in a bid to support the hard-hit events and entertainment sector.

The next economic event to watch out for from the UK is tomorrow with several large releases. This includes GDP figures, Good Trade Balance, and Industrial Productivity. With the UK economy ‘bouncing back’ following Covid lockdowns GDP figures are expected to show strong gains which could well increase the Pounds value further. 

This release has been widely speculated about however so any change from the forecasted release of 4.8% could well result in a drop in the Pounds value from these recent highs.  The question for any GBP seller currently will be whether any further gain against the Single currency will be worth the risk following Sterling’s recent climb to an 18-month high?

HOW CONCERNING IS THE EURO’S ‘WEAKENING’?

The single currency has been weakening of late due to several factors. Recently the latest ZEW economic release, which is a form of business confidence, dropped sharply. This was at the worst level seen since November 2020 due to Covid concerns but also a slow-down in China’s economic growth which is the eurozone’s largest trading partner.

The president of the ZEW, said: ‘expectations have declined for the third time in a row. This points to increasing risks for the German economy, such as from a possible fourth Covid-19 wave starting in autumn or a slowdown in growth in China.’ The German slowdown referred to is a reflection to their latest industrial productivity which slowed and highlighted concerns about challenges within the supply chain impacting future expansion.

However, there has been some positive economic data from the euro area with retail sales climbing by 1.5% from May to June. Retail sales in recent times have also remained above pre-pandemic trends as restrictions were eased.

Saying that there does seem to be some doubt around the prospect of a fourth Covid wave going across Europe with many European countries tightening restrictions as case rates rise. France for example has introduced a requirement for proof of vaccination to visit everything from bars to using public transport on long train trips.  As a result of this policy, they have experienced a steep climb in the number of vaccinations being administered, which in turn has led some to predict that France could well overtake the UK in the number of fully vaccinated citizens in the summer.

When Is The Best Time to Buy US Dollars?

US ECONOMIC GROWTH PUTS GBP-USD AT A 2-WEEK LOW

GBPUSD rates currently sit at a 2-week low following strength from the greenback. Recently the US unemployment rate fell from 5.9% to 5.4% in July as the world’s largest economy added 943,000 jobs.

Employers remain wary however with many US employers delaying plans to return to office as the number of new cases in the US rose 48% week on week. This was put down to the highly transmissible Delta variant of Covid-19.

Moving forward for the US today we have Consumer Price Index figures released.

This is expected to show a slowdown in growth which if confirmed could well result in some weakness for the USD and in turn make the dollar cheaper to buy with the Pound.

Slightly longer term most will be waiting for the timelines of their latest infrastructure bill to pass which has speculated to be as an additional $595 bn of new spending, supporting growth and employment.

This is yet to go through the House of Representatives but could well impact the Greenbacks value if passed or not.

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).