27/05/2021

Market report: pound in need of a boost


GBP

Recent volatility around sterling eased on Wednesday as the currency traded within recent ranges against the euro and dollar.

Having been one of the year’s best performing currencies, sterling appears to have stagnated as it awaits fresh impetus. Analysts are suggesting future good news, like the end of lockdown on June 21st, has already been absorbed into the price.

Since January, sterling had been trading on the front foot, appreciating close to 7% against the euro and dollar at times. The main reason being improving growth prospects for the economy amid a world leading vaccination rollout.

Since then, however, the US and Eurozone closed the vaccination gap, boosting their currencies.

Sterling’s current lack of direction also likely lies with the Bank of England (BoE). Having seen a sharp improvement in economic data of late, investors had increased bets the BoE may taper monetary policy by reducing its quantitive easing programme and bringing forward its interest rate guidance.

That talk has proven premature with BoE policymakers only this week downplaying the expected rise in inflation. This has consequently forced sterling bulls to re-think expectations of a shift in the bank’s stance.

Instead, investor focus has turned to the European Central Bank (ECB) with optimism growing the ECB may be the first central bank to alter monetary policy amid strong economic data releases and an ever improving vaccination rollout.

Lastly, investor concern regarding the Indian variant sweeping through northern England may also be weighing on sterling as this ultimately threatens the prospects of the UK government completely easing lockdown restrictions in June.

With good news already priced in, sterling will likely need to see some stellar data releases over the next few weeks and months. A swift resolution to the Covid breakout in northern England might also aid a move higher and force the BoE into a policy rethink.

The risk is that data doesn’t quite live up to the lofty expectations investors have set and results in a pullback. Recent US economic data shows this is definitely possible

Key announcements

13:30 – USD – Durable Goods Orders expected 0.7%
13:30 – USD – Nondefense Capital Goods Orders ex Aircraft (Apr) expected 0.8%
13:30 – USD – Gross Domestic Product Annualized (Q1)


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