Currency Note

Pound still strong after GDP data

By Christopher Nye May 12th, 2021

Sterling is still strong against the euro and the dollar this morning, holding onto its gains made after the local election results. GDP data released for the UK this morning shows that the economy shrank in the first quarter of this year but rebounded in March.

Chancellor Rishi Sunak has commented on the GDP figures, saying that “despite a difficult start to this year, economic growth in March is a promising sign of things to come.”

The euro strengthened yesterday after positive economic sentiment figures from both Germany and the Eurozone as a whole. The easing of restrictions in countries across Europe has boosted optimism for economic recovery.

In the US, the markets will be keeping a close eye on inflation rate data, which will be released this afternoon.

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GBP: UK GDP data shows rebound in March

The pound is still strong against the euro and the dollar this morning, holding onto gains made at the start of this week. It strengthened due to waning political risks after the local elections last week and also because of the successful reopening of the UK economy, with restrictions being eased again from the start of next week.

After failing to move the pound last week, possibly due to the local elections, the optimistic tone from the Bank of England last week could also be fuelling the pound this week. They announced that they would reduce quantitative easing and raise economic forecasts due to the reopening of the economy.

Preliminary GDP data released this morning shows that the UK economy shrank by 6.1% year-on-year in the first quarter of 2021 and shrank 1.5% quarter-on-quarter. The quarterly figure is slightly better than the estimated 1.6%.

However, figures also show that there was a 2.1% rebound in March as schools reopened.

GBP/USD chart

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EUR: Positive economic sentiment supports euro

The euro is strong against the dollar and slightly weaker against the pound this morning. The single currency was given a boost yesterday due to a positive data release.

The German ZEW Economic Sentiment Index, which gauges investor sentiment, jumped to 84.4 in the May survey from 70.7 previously, the highest level since 2000. This shows that the German economic situation is improving.

There was also an improvement for the Eurozone’s Sentiment Index, which rose to 84 from the previous reading of 66.3. This has been boosted due to the easing of restrictions in countries such as France, Italy and Spain.

German inflation rate figures for April, which were released this morning, increased to 0.7% month-on-month and 2% year-on-year – the highest rate since 2019 due to the end to a temporary reduction of VAT.

USD: US inflation rate data today

The dollar is still weak against the pound and euro this morning but has strengthened slightly against a basket of currencies ahead of the US consumer price index, which will be released later today.

The data is expected to show a 3.6% lift in year-on-year prices, boosted by last April’s low base. St. Louis Federal Reserve President James Bullard said yesterday that he expects inflation could be as high as 2.5% next year.

Fed Governor Lael Brainard also spoke yesterday and said that the disappointing Non-Farm Payrolls data released last week shows that the recovery of the US economy still has a long way to go.

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