Currency Note

Covid fears knock sterling to 10-week low against EUR

By Christopher Nye July 20th, 2021

Nightclubs and bars opened to full capacity yesterday, but it was sterling suffering the hangover

Global stock markets fell across the world yesterday, taking sterling down with them to its lowest point against the euro for 10 weeks and against the euro for 6 months.

It wasn’t meant to be like this; with 19 July being the day that almost all Covid-19 restrictions were due to end, with nightclubs and theatres open to full capacity and social distancing and masks no longer officially mandated.

However, with hundreds of thousands of workers being forced to self-isolate due to rising Covid cases, the UK economy is still facing severe headwinds, and other safe haven currencies are gaining at the expense of sterling.

Yesterday we also heard from two Bank of England MPC members pouring cold water on any imminent increase in interest rates or cutting of QE. External policymaker Jonathan Haskel and new member Catherine Mann said, respectively “Tight policy is not the right policy” and [on worries over inflation] “you’ve got to see the whites of their eyes”.

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GBP: Pound hits 10-week low against euro

The pound was routed by virtually all major currencies yesterday, with losses across the week of over 1% against the euro, US dollar and Swiss franc.

The main reason for the decline is concern that the UK economy is unlikely to bounce back as quickly as hoped for by the (already priced in) “Freedom Day” rules’ relaxation, plus two MPC members coming out against tighter monetary control.

While yesterday’s fall, continuing this morning, is a reversal after two months of gradual gains, sterling remains 5% higher than this time last year against EUR and around 9% stronger than USD this time in July 2020.

A relatively quiet early part of the week for data continues, with no significant data releases today, but Public Sector Net Borrowing tomorrow and CBI Business Optimism on Thursday. Of much more interest will be Gfk Consumer Confidence overnight on Thursday followed by retail sales on Friday morning.

GBP to USD over past year

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EUR: Euro makes big gains on sterling

The single currency enjoyed a broadly positive day, strengthening against all but the US dollar yesterday and extending its lead on the week to nearly 1.25% against the pound.

It continues to benefit, like the US dollar, from worries over a new phase to the pandemic, as vaccinated economies grapple with rising infection rates just as they attempt to restart their businesses.

Construction output data for the eurozone yesterday was far below of expectations for May, and the more important data releases this week include Business Confidence for Europe’s second biggest economy, France, on Thursday morning.

That will all feed into the European Central Bank’s interest rate decision on Thursday. On the inflation front, we’ve heard this morning that Germany’s producer prices rose 8.5% last year, the largest increase since 1982 and fractionally higher than expected.

USD: Dollar profits from variant fears

The dollar had a stellar day yesterday, strengthening against all major currencies and extending its strength against commodity-backed currencies like the Canadian and Australian dollars and Norwegian krone to around 2% over the week and against sterling to just over 1%.

The dollar is currently at its strongest against GBP since the first week of February and against the euro since early April.

The dollar gained from its “safe haven status” as Covid variants continued to worry global markets.

On America’s domestic front, its property market boom looks to have slowed, with the NAHB housing market index falling for the second month in a row, as builders struggle with vastly inflated building material costs and shortages.

There will be more on housing this week, with building permits and housing starts today and home sales for June on Friday.

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