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The Pound was off to a solid start at the beginning of 2021, holding firm against the US Dollar and rising a cent against the Euro. As has been the case for the past three months, most currency movements have been driven by the rate of Covid-19 vaccinations on a country-by-country basis, and the Pound has been no exception, and has even benefitted from a spat with the EU over access to UK-made vaccines.

Less impactful for the Pound was the most recent economic data relating to the UK economy. Towards the end of January, we saw the International Monetary Fund (IMF) downgrade the growth expectations for the UK economy. Only last October the IMF expected to see UK GDP growth in 2021 hit 5.9 percent, but that has now been reduced to 4.5 percent. Furthermore, the international body sees no boost to economic growth from the vaccine rollout until 2022 at the earliest.

The IMF’s report comes hot on the heels of the latest GDP figures, which cover November 2020. These revealed a 2.6 percent contraction in growth, prompting the chancellor, Rishi Sunak, to say it highlights the scale of the challenge faced by the economy, adding “Things will get harder before they get better.”

UK VACCINATION PROGRAMME CAUSES CONTROVERSY AS SPAT WITH EU OVER VACCINE DOSES TURNS UGLY

A disagreement between the UK and the EU over the allocation of vaccines made by the Anglo-Swedish pharmaceutical firm AstaZeneca is threatening to spill over into legal action when it was revealed that the bloc was only expected to receive a quarter of the 100 million doses it had ordered. There are concerns that British citizens are being prioritised over those in the EU, which is facing criticism due to vaccine supply shortages caused by production problems at the Pfizer plant in Belgium. With so much economic activity depending on the rapid rollout of a vaccine, the French and German governments are threatening legal action against the firm.

At the same time, the UK Office for National Statistics (ONS) has reported the percentage of people testing positive for the virus had begun to diminish. The government’s scientific advisory group, SAGE, reported that the UK’s R-level, which reflects the average transmissibility of the virus, was between 0.7 and 1.1 for the UK and 0.7 and 1.0 for England. If the R-level is above 1, then the epidemic is growing; anything below 1 indicates it is receding. Currency markets are monitoring the R-level closely and are using it as a proxy for expectations on the likelihood and timing of an economic rebound.

So far, the Pound has only gained marginally following the vaccine disagreement with the EU, strengthening to €1.14 on the month. Against the US Dollar, Sterling has been almost rangebound throughout January, with markets waiting to assess the likelihood of President Joe Biden’s massive stimulus plan gaining approval.

US DOLLAR IN HOLDING PATTERN AS BIDEN TAKES OVER AT THE WHITE HOUSE

The Dollar remained stable throughout January, weakening only slightly but putting a stop to the decline we have witnessed over the past few months. The DXY Dollar Index recovered from its sub-90 level to end up at 90.5 by 31 January. One of the first promises the new president Joe Biden made was to roll out a massive $1.9 trillion stimulus programme to help the US economy recover from the effects of the Covid-19 containment measures.

Markets are waiting to see whether Republicans will back the virus relief package, and if it seems clear it will go ahead, we may see the US Dollar continue to weaken as investors seek out risk.

The US economy remains in a delicate state, with the latest Non Farm Payrolls revealing employment numbers are not picking up as expected. On the other hand, the most recent manufacturing PMI did reveal an uptick in activity, beating forecasts and rising to 60.7, so we could say it’s a mixed picture at present.

Against the Pound, the Greenback slid from £0.73 to £0.72 over the course of January.

EURO VULNERABLE TO DOUBLE DIP EUROZONE RECESSION

The Euro devalued overall against a basket of currencies in January, despite an early rally against the US Dollar. There was a definite upward trend in the GBP/EUR exchange rate for the latter half of the month, almost certainly driven by the perceived success of the respective vaccine rollout programmes in the UK and EU. Germany, meanwhile, tightened travel and trade restrictions in response to the surging virus caseload, with Chancellor Angela Merkel saying that pressure on the nation’s hospitals due to a new virus strain was unacceptable.

In terms of economic news January’s Eurozone PMI Composite data came in below forecasts, dropping from 49.1 to 47.5 – a marked contraction. Chris Williamson, the Chief Business Economist at IHS Markit, stated that a “double-dip recession for the Eurozone economy is looking increasingly inevitable” as tighter Covid-19 restrictions took a further toll on businesses in January. Economic news aside, the main driver of the Euro in January continued to be the relative strength of its main rival, the US Dollar, as well as the ongoing vaccine rollout. Meanwhile, the European Central Bank (ECB) kept interest rates at zero at its latest meeting, with policymakers agreeing that a rate cut into negative territory was not yet needed. This provided a glimmer of hope for the Eurozone economy, despite concern over the bloc’s rising Covid-19 caseload and potential shortages of vaccines in the first quarter of 2021.

The Euro weakened slightly in January overall, and this was observed too against the Pound as it fell from £0.90 to £0.89.

AUSTRALIAN DOLLAR FALLS OUT OF FAVOUR AS RISK AVERSION RISES

While 2020 was a good year for the Australian Dollar, 2021 is proving to be less so, with the Aussie weakening significantly in the first month. Being sensitive to global risk factors, demand dropped for AUD as worries surfaced about the global vaccine rollout efforts, as well as the discovery of more strains of the virus. On top of this, falling stock markets and political turbulence in the US made investors back away from risk correlated currencies.

Nevertheless, the market mood cooled towards the end of the month, perhaps in anticipation of the Reserve Bank of Australia’s meeting on Tuesday, which may have put a halt to risk aversion.

The Pound was able to take advantage of the Aussie’s sticky patch, appreciating from a low of AU$1.74 on 6 January to finish off the month at AU$1.80.

WHAT TO LOOK OUT FOR IN FEBRUARY

Over the coming weeks we can expect market focus to remain steadily on the various national vaccine rollout programmes and the subsequent likelihood of the restoration of economic activity in key sectors. The emergence of new strains of the Covid-19 virus are likely to impact risk appetite, especially if it these new strains are immune to vaccines.

In the US, the big thing to look out for is whether Joe Biden’s giant stimulus bill is passed. If it is (as seems very likely) there’s a good chance the US Dollar could continue its downward trajectory as the increased supply of new Dollars causes a deflationary effect on the currency.

In addition, the recent ‘revolution’ (as some are calling it) among retail investors short selling stocks and precious metals does have the possibility to destabilise equity markets to an extent – another factor that could cause risk aversion. If this happens it could cancel out any Dollar devaluation, meaning GBP/USD could come under pressure.

As for GBP/EUR attention will be fixed on the possible legal challenge to AstraZeneca, with developments here liable to affect the value of the Euro if it means the Eurozone will remain closed for business for longer.

Finally, Sterling investors are awaiting the final Q4 2020 GDP figure, which comes out on 10 February, to discover just how far GDP fell back last year. If this figure surprises to the upside we can expect to see the Pound retain its current buoyant form for longer.

The Q1 2021 GBP/EUR bank averaged forecast is €1.13, while the forecast for GBP/USD is $1.35.

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