Pound/US Dollar (GBP/USD) strengthens to $1.40

Pound/Euro (GBP/EUR) slides to €1.15

Pound/Australian Dollar (GBP/AUD) slips to AU$1.78

The Pound has spent the last four weeks going in two different directions versus its main exchange partners. In the case of the Pound to US Dollar exchange rate, GBP has strengthened markedly, rising 3 cents over the past month. On the other hand, the Pound hasn’t done as well against the Euro, and we’ve seen it fall from around €1.18 in early April and remain more or less static since then, apart from a couple of attempts to break higher.

The main reason for the Pound’s uncertain movements since early April has been all to do with the waning strength of the US Dollar, as well as the relative speed of Covid-19 vaccination rates in respective areas. The Dollar has fallen markedly over the last month due to investors opting to pursue riskier currencies, and also as a result of the continued stimulus money being pumped into the US economy by Joe Biden. To add to Sterling’s recent – albeit low-key – volatility, has been the local elections across the UK, which has seen a major shift in voter alignment away from the Labour Party, as well as raised the spectre of the UK breaking up if a referendum on Scottish independence takes place.

POUND NEWS: LOCAL AND REGIONAL ELECTIONS GIVE STERLING A LIFT

The results of last Thursday’s local and regional elections had been long seen as having the potential for causing a slump in the value of the Pound. In the event, the Pound remained mostly steady, and actually rose a cent against the US Dollar. The main concern among Pound investors was that a clear win for Nicola Sturgeon’s Scottish Nationalist Party (SNP) would give a clear mandate for another referendum on whether to break away from the UK.

It became clear over the weekend that the SNP were one seat short of an overall majority in Holyrood, meaning the chances of a second independence referendum had become slimmer. The Prime Minister, Boris Johnson, furthermore stated that any attempt at holding such a referendum would be challenged in the courts. Scotland’s First Minister, Nicola Sturgeon, reacted to this by saying it would be “absurd and completely outrageous” if the government attempted to block a referendum.

And while this might be bad news for those backing independence, it was good news for Pound investors, who saw Sterling rise by a cent against the US Dollar as the likelihood receded that Scotland’s economy would be hived off the UK’s.

In other news, Covid-19 vaccinations in the UK reached a new milestone, with a quarter of UK adults now fully vaccinated. This has continued to buoy optimism in an economic rebound, which economists are saying will take place with the further easing of lockdown measures over the next couple of months. The Bank of England’s (BoE) deputy governor Ben Broadbent echoed this sentiment, saying the UK is now likely to see a “very rapid” recovery once restrictions are lifted.

There was more from the BoE last week, when it announced a gradual slowing down of stimulus bond buying as a means of supporting the economy. The Bank remained optimistic about near-term economic growth prospects but said there would need to be clear signs of recovery before any further measures were announced.

US DOLLAR CONTINUES TO SHOW A WEAKENING TREND AS STIMULUS MEASURES CONTINUE

The US Dollar has been on a weakening path since the start of April, losing around 4 percent of its value on average. The Federal Reserve was one of the reasons for the Dollar’s decline during April, with America’s central bank indicating that interest rates would remain lower for longer. This pledge boosted stocks on Wall Street, but it had the opposite effect on the Greenback.

Meanwhile, US President Joe Biden promised another tranche of stimulus money for the economy, with the announcement on the eve of his 100 days in the job that a further $1.8 trillion would be earmarked for social projects. Biden went on to claim that much of this money would be raised by cracking down on wealthy individuals and corporations who use tax havens.

However, there was disappointment on Friday when the latest US jobs data was released. Analysts had been expecting up to a million new positions to have been created in April, but the Nonfarm Payrolls figure revealed a much lower 266,000. There were job losses across the board, with almost every sector reporting losses or shortages of labour. Some bosses are now calling on stimulus money to be wound down, claiming that workers have decided to stay at home rather than seek employment.

By 10 May, the GBP/USD exchange rate was trading at $1.40, which is up 3 cents on the rate of a month previously.

EURO’S REVERSAL OF FORTUNE CONTINUES AS ECONOMIC DATA IMPRESSES

The past few weeks have been good for the Euro, which has benefitted not just from a speeding up of the various national vaccine rollouts across the Eurozone countries but also from the weakness in its rival the US Dollar, as well as some stronger-than-expected data. The European Commission now claims that 70 percent of all EU adults will be vaccinated by the end of June. This helped shift the previously pessimistic mood towards the Euro, allowing it to appreciate against the US Dollar and hold its ground versus the Pound.

Economic data was also strong across the Eurozone, with manufacturing and services both picking up pace. In fact, the flash composite PMI (Purchasing Managers’ Index) figures for April – which gives an immediate insight into the state of the economy – revealed a record-breaking figure of 62.5. As a reminder, anything about 50 is considered good. Chris Williamson, the head of HIS Markit which collates the figure, expressed his astonishment saying, “Production and order books are growing at rates unprecedented in nearly 24 years of PMI survey history.”

This combination of better-than-expected economic data, the relaxing of lockdown restrictions, and a weaker Dollar all caused the Euro to remain strong over the past four weeks in relation to its main rivals. The GBP/EUR exchange rate was trading at a rate of €1.15 on 8 April, and it was trading at exactly the same rate a month later, albeit with a couple of jumps up to €1.16 in the interim.

AUSTRALIAN DOLLAR RIDES COMMODITY PRICES HIGHER

The Australian Dollar has been generally drifting higher over the past four weeks, with the GBP/AUD exchange rate sitting at AU$1.78 at the time of writing. Since early April the Aussie has risen by around 3 percent against Sterling, driven for the most part by rising commodity prices, especially iron ore and copper. At the same time, there’s been an increased appetite for risk on the currency markets, which is always of benefit to AUD.

But it isn’t all good news for the Antipodean currency. Storm clouds are gathering on several fronts, not least because of a war of words between the Australian and Chinese governments. China has suspended all dialogue related to trade and economics after Canberra levelled accusations that Beijing should answer for the coronavirus outbreak which crippled the world economy. China retaliated, saying that Australia has a “Cold War mentality”. Given that China is Australia’s biggest trading partner, any breakdown in trade relations could have serious consequences for Australia’s economy.

Over the last month, the Pound has slipped back against the Australian Dollar to hit a rate of AU$1.78 on 10 May.

WHAT TO LOOK OUT FOR IN THE COMING WEEKS

Now that the big unknown of the UK elections is over, the rest of May will likely be focused on continuing risk associated with Covid-19 outbreaks – most recently a variant that has ripped through India. If clusters of this variant continue to show up in different parts of the globe, there’s the danger that the brakes will be put onto the lockdown easing measures, and risk appetite will drop off once again, weakening the Pound.

On the other hand, if these localised outbreaks fade away we’re likely to see the long-awaited uptick in global economic recovery, which would likely negatively impact the US Dollar but be of benefit to the Pound. Meanwhile, the divergence between UK and Eurozone vaccination rates will continue to have an effect on the GBP/EUR exchange rate. With the possibility of holiday destinations opening up for visits again later this month, many EU countries are speeding up their vaccine rollouts in order to lure foreign visitors and kickstart their beleaguered travel and hospitality sectors.