Almost a year since the spread of the pandemic, the Pound exchange rates remain linked with the global economy, and it is interconnected with how well the British Pound does in the stock market. The US dollar also tends to be inversely related, and this type of combination strengthens the Pound-to-Dollar or GBP/USD exchange rate moves when the global conditions, like the pandemic, affect the exchange rates.
Basically, when the economy does well, the GBP/USD exchange rate improves, but when the economy is doing poorly, the GBP/USD suffers.
After a sensitive take on January 18, the exchange rate confidence has improved despite the expectations of strong U.S. fiscal and monetary support.
UBS has pointed the importance of global growth, stating: “The pound is a pro-cyclical currency, and the UK usually profits from investment inflows whenever global growth is strong. After many years of Brexit stress and an undervalued pound, this pro-cyclicality might have an even bigger impact than normal.”
In this case, the GBP/USD has recovered from 1.3520 last week to 1.3600 on January 18, while the pound-to-euro rate or GBP/EUR is around 1.1240. If the confidence in the exchange rate fades again, the GBP/USD will suffer a setback.
UK Vaccine to Underpin the Pound Sterling
In the United Kingdom, Sterling has gained net support from optimism over the coronavirus vaccine program, with numerous vaccinations administered in the UK, moving above 4 million. There was also improvement noted in the data from last week that shows the economy is doing better than expected.
According to MUFG, “The encouraging developments ease some of the immediate pressure on the BoE to provide more stimulus as soon as in February.”
Despite this, reservations were surrounding UK fundamentals. Citifx, most especially, are still cautious over the pound exchange even though the data shows it is looking good. “Our medium-term bearish view remains. Risk of lockdown extensions and the lower efficacy of the Oxford/AZ vaccine takes the shine off the UK’s impressive vaccine rollout progress,” a report from the company says.
Pound Sterling warned that the account deficit is liable to hit high numbers even though there is trade friction, and capital flows will still be limited because of this.
The head of FX strategy, Rabobank, is also cautious and doubtful that GBP/EUR can hold above 1.1110.
“I don’t think the fundamentals in the UK are anything like good enough to really keep that better tone that we’ve seen,” says Jane Foley from FX strategy
U.S. Dollar Sees a Dip
On January 19, the U.S. dollar showed improvement in Europe as markets continued to react to the U.S. retail sales data presented last week.
However, even though it showed good numbers at the beginning of the week, the U.S. currency could not hold its position and dipped in Asia on January 19. There were expectations of fiscal and monetary support from policymakers from the United States.
Nominee Yellen, the U.S. Treasury Secretary of the Biden Administration, will face a Senate confirmation hearing on January 19. According to reports, she will state that the U.S. should increase support for the economy, especially now that the interest rates are meager.