08/01/2021

Sterling under pressure from potential early move from Bank of England


USD

The dollar found some support in the form of a flurry of safe-haven demand yesterday. The increased demand for safe-haven currencies had been caused by investors acting cautiously amid concerns that the coronavirus pandemic is spiraling out of control once again, whilst Wednesday’s US political chaos failed to calm investors.

Despite Wednesday’s drama in the US, we did eventually see the Democrats edge a majority in the Senate. This represents a huge risk for the dollar for the year ahead as it is expected that by holding the Senate and the House it will be much easier for the new President Joe Biden to introduce new policies and increase fiscal spending. Something that a Republican Senate would have looked to block.

GBP

Sterling fell against both the euro and dollar yesterday reeling from its worsening COVID-19 situation, but also, speculation that the Bank of England could cut the UK interest rate in a bid to limit the economic fallout caused by another lockdown.

Following the government’s announcement earlier in the week to re-introduce a nationwide lockdown until mid February, there are concerns that economic growth in the UK will suffer once again whilst restrictions are in place. As a result, investors are raising bets that the BoE will be forced to act and may soon cut its base interest rate from 0.1% to below 0% in an effort to support the British economy, with money markets now pricing in a 10 basis point cut before August.

With coronavirus infections close to their highest levels since the pandemic hit the UK in March and concerns that the lockdown could go beyond February, there is an argument that we could see action much sooner with some analysts mooting the BoE’s meeting on the 4th February as a potential date.

The IHS Markit construction PMI dipped below expectations of 55 to read 54.6 yesterday. Whilst falling just short of its forecast, the data illustrates a positive end to the year for the UK Construction sector as a reading above 50 represents a healthy expansion. The data also showed a recovery in construction employment numbers for the first time in nearly two years and the most optimistic growth expectations since April 2017.

Key announcements

  • 13:30 – USD – Non Farm Pay Rolls expecting 71,000 from 245,000 previous

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