GBP

Sterling traded close to recent highs on Thursday benefitting from news that the UK are leading Europe on rolling out its COVID-19 vaccination programme whilst expectations of an imminent interest rate cut from the Bank of England cooled.

Rate cut expectations gained traction in the early part of this month following the tightening of lockdown measures in the UK. Investors sold the pound as it was feared the Bank of England may delve into negative rate territory to help kick-start the UK economy. However, negative rate expectations were dampened this week following Governor Bailey’s comments that they were “controversial” and caused “lots of issues”.

Having administered three million vaccines up until now, currency markets are largely being driven by expectations of how quickly economies could return back to normal. With Brexit headwinds cleared, the UK announcing the introduction of mass-vaccination centres and leading the EU in its vaccination race, investors are expecting the UK economy to bounce back quicker than the EU. To show how far in front the UK are compared to the EU, the UK administered the same number of vaccines yesterday as France have in total. This is making the country an attractive proposition for foreign investors and is driving GBP demand.

There was some cause for concern for the UK economy this morning after GDP contracted in November ended a run of six consecutive months of growth, indicating that we could be heading for a double dip recession. According to data from the Office for National Statistics, UK GDP contracted 2.6% in November as the second national lockdown was implemented. Despite this, the contraction of 2.6% was better than initial market expectations of 5.7%.

It must be noted that economists expect UK GDP to have grown in December, when lockdown restrictions were relaxed in the first part of the month. However, a new economic downturn is forecast for the new year as restrictions were introduced again to tackle the UK’s soaring COVID-19 infection rate.

USD

The dollar’s resurgence from near three year lows halted yesterday after US Federal Reserve Chair Jerome Powell stated that US interest rates wouldn’t rise any time soon and rejected suggestions the Fed may start reducing its bond purchases in the near term.

Speaking yesterday, Powell stated that whilst the US economy remains far from where the Fed want it to be, he sees no reason for changing its highly accommodative stance until the “job is well and truly done”.

President-elect Joe Biden unveiled a $1.9 trillion coronavirus relief proposal to help combat the pandemic and the economic crisis it has caused. The plan includes $160 billion to improve vaccination and testing efforts, $350 billion for state and local governments as well as $1 trillion in relief to families, via direct payments and unemployment insurance. The impact on the dollar was subdued as a significant stimulus proposal had already been priced into the market ahead of the announcement.

Key announcements

• 07:00 – GBP- GDP (MoM – Nov) Exceeded expectations of -5.7% to read -2.6%
• 07:00 – GBP – Manufacturing Production (YoY – Nov) Exceeded expectations of -4.8% to read -3.8%
• 13:30 – USD – Retail Sales (MoM) (Dec) Expected to increase to 0% from -1.1% previous
• 15:00 – USD – Michigan Consumer Sentiment Index (Jan) Expected to decrease to 80 from 80.7