James Lovick
August 27, 2021

UK COVID Recovery Continues

"The markets are also closely monitoring the impact of a surge in Delta variant coronavirus cases which may threaten the EU economic recovery"

The pound continues to trade in its recent narrow trading range with interbank rates now tracking lower for GBP vs EUR and GBP USD.

UK Gross Domestic Product has seen a sharp increase with the economy growing at 4.8% in the second quarter. After much uncertainty, the data has shown that the UK economic recovery is looking like a V-shaped recovery. This bodes well for the UK economy going forward if this trajectory can continue. However, it is worth highlighting that the UK still has further to recover than some other big economies. In the US, GDP has already returned to pre-pandemic levels whilst other countries to include Japan, Germany, France, Italy, and Canada are getting closer to growth levels seen before the pandemic.

How the UK recovery continues and the ongoing outlook on Covid will both impact the direction of travel for the pound going forward. Any further clues as to how disruptive Covid is going to be this Autumn and Winter both in the UK and the Eurozone are likely to create a movement for the pound.

For the time being the UK has avoided recording 100,000 covid cases per day as many ministers and scientists had forecast back in July. Cases are currently sitting at a third of that figure. Professor Neil Ferguson at Imperial College London said “When schools reopen and people return to offices, we could see a quite major epidemic of cases and infections from September onwards.”

Another concern is that Israel is currently seeing a fourth wave of the pandemic. Israel was able to achieve one of the fastest rollouts of vaccinations but now 90% of new cases in Israel are in the over 50’s category. If the booster programme for elderly people proves ineffective then another lockdown may be required and will cause deep concern for other countries.

Dr. Tom Wingfield, a senior clinical lecturer at Liverpool School of Tropical Medicine has said that it is “inevitable” that Britain will suffer the fourth wave of coronavirus adding “Indeed, we might be at the beginning of this wave now.”

There are no economic data releases of note today. Nationwide house price data is released on Monday whilst UK Purchasing Managers Index data for the manufacturing sector is released on Wednesday which should offer some clues as to the recovery in this sector. Economic data is having less of an impact on the currency markets unless the numbers are very wide off forecast. As such the next Bank of England meeting September 23rd may offer some renewed guidance from the central bank which may cause the pound to move.

Euro

The European Central Bank next meet 9th September and the event could prove to be a market mover for Euro exchange rates. EU Consumer Price Index inflation numbers for August are released on Tuesday next week and may prove influential in the central bank’s decision-making.

The ECB has so far been keen to stress that inflation which rose to 2.2% in July is temporary and the spike does not warrant any change in policy at this time. ECB President Christine Lagarde has previously said that interest rates won’t rise until inflation is sustainable at 2%. Although inflation broke through 2% last month and rose at the fastest pace since 2018, the central bank’s view is that the spike will pass. The markets are currently pricing in the expectation of a rate hike in about three years’ time. However, should the inflation data prove resilient then the guidance from the ECB could begin to change. The US has recorded very high inflation over 5% whilst the Bank of England has forecast UK inflation will break over 4% later this year highlighting how the issue could soon become a reality for the Eurozone too.

The markets are also closely monitoring the impact of a surge in Delta variant coronavirus cases which may threaten the EU economic recovery. In France, the health minister has suggested the fourth wave of the pandemic could peak in France in a few days’ time which would prevent the need for a fourth lockdown. Like in the UK, the focus will be on people returning from holidays in the days and weeks ahead as well as schools returning next week. How much of an influence these factors will have on daily Covid confirmed cases remains unclear.

Dollar

Rates for GBP vs USD are currently sitting around 2 cents under the high of 1.3950 seen at the beginning of August. The US dollar remains supported on the back of safe haven demand as markets still digest developments in Afghanistan. Fed Chair Jerome Powell will be making a speech on the economic outlook at Jackson Hole later today and should be marked in the diary as an event to spark volatility. Any clues as to future monetary policy could see some volatility for the dollar.

US Gross Domestic Product numbers released yesterday arrived marginally lower than expected at 6.6% for the second quarter highlighting a strong recovery is still in place. Weekly initial jobless claims also released yesterday saw a small increase in the number of Americans filing for unemployment benefits although the trend has been very positive in recent weeks. 353,000 filed for benefits, up from 349,000 a week earlier and considerably lower than the 900,000+ that was seen earlier this year in January. Despite what appears to be a healthy labour market, the Delta variant is creating uncertainty for the economic outlook. US daily cases are running at about 129,000 but the concern is that could easily jump to 200,000. Dr Francis Collins, director of the US National Institutes of Health said, “I will be surprised if we don’t cross 200,000 cases a day in the next couple of weeks, and that’s heart-breaking considering we never thought we would be back in that space again.” He adds that “This is going very steeply with no signs of having peaked out.”

Data releases for the US are light today with just US consumer spending numbers. Next Friday sees the monthly US non-farm payroll data which is always poised to create volatility for dollar exchange rates. US non-farm payrolls earlier this month added 943,000 jobs in July whilst unemployment fell to 5.4%. Any further signs that the labour market is holding up could help lend support to the dollar.

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