RationalFX : GBP boosted as economy optimism grows

RationalFX : Sterling made gains against the euro on Tuesday, trading close to a 13 month high, a modest 4.5% gain since the start of this year.

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RationalFX

GBP

…This rise can mostly be attributed to growing optimism around the UK’s vaccination rollout, an expected economic bounce from eased lockdown measures and the Bank of England (BoE) looking less likely to implement negative rates.

In comparison, the EU is still battling to contain the pandemic with parts of Europe even extending lockdown restrictions. Plus, the bloc’s vaccination programme continues to lag behind the rest of the world and the European Central Bank is showing no signs of slowing its accommodative policy stance, all of which are denting demand for the euro.

This morning, the Office for National Statistics (ONS) released data which showed that the UK’s economy bounced back stronger than expected for last year’s Q4, growing by 1.3% and surpassing an expected 1% growth.

However, overall the UK economy shrank by 9.8% in 2020, its worst slump in 300 years. Whilst a return to lockdown during the first quarter of 2021 is likely to shrink the economy again, economists are predicting a strong rebound once the country reopens further. BoE Governor Andrew Bailey has even stated that the economy could return to pre-pandemic levels by the end of the year

USD

The dollar continued to hold its ground against sterling and the euro during Tuesday trade as an ever improving economic outlook and expected rise in inflation caused US treasury yields to rise again.

As of yesterday, US treasury yields were trading at 14 month highs. This is usually an indicator that higher inflation is expected which could ultimately force the Federal Reserve to tighten monetary policy sooner rather than later.

The upbeat outlook on the US economy was further supported by US consumer confidence data which posted its highest level since the pandemic begun.

Investors will be eyeing the non-farm payrolls release later this week as the Fed have noted the lagging labour market as one of the reasons for their lower interest rates for longer stance. A positive reading here will do little to bring rising yields under control and only add to the belief that higher inflation and Fed action is round the corner.

Key announcements

07:00 – GBP – Gross Domestic Product (QoQ) (Q4)
Actual 1.3%, 1% previous

10:00 – EUR – Consumer Price Index Core (YoY) (Mar)
Expected 1.2%

10:00 – EUR – Consumer Price Index (YoY) (Mar)
Expected 1.3%

13:15 – USD – ADP Employment Change
Expected 550k

21:20 – USD – President Biden Speech