Overall confidence in the pound (GBP) exchange rates remained strong on further optimism that the UK’s vaccination program will lead to a faster and stronger recovery versus the euro zone.
The sterling-euro exchange rate (GBP / EUR) posted 9-month gains at 1.1500 on Wednesday with only a slight correction as UK inflation data had little impact.
The pound-to-US dollar (GBP / USD) exchange rate hit a 34-month high just above 1.3950 on Tuesday, before plummeting back below 1.3900 as higher bond yields and concerns about trends in US inflation triggered an abrupt recovery in the US dollar.
There has been further optimism that the UK’s vaccination program will allow for an easing of coronavirus restrictions from March and help trigger a strong economic recovery.
HSBC noted expectations for an interim schedule of a reopening path next week; “While the UK remains locked down, the government is expected to announce a path for a reopening on Monday. Prime Minister Johnson said “we want this blockade to be the last” and we want “progress to be cautious but irreversible”.
Caroline Simmons, UK Chief Investment Officer, UBS Global Wealth Management noted; “Even though the UK is currently stalled and growth this quarter will be negative, the macroeconomic environment for the full year remains strong and inflation contained.”
Bank of America remained cautious on the medium-term outlook; “Despite the strength of the GBP in the short term following the Brexit deal and the faster vaccination rate, we remain bearish in the longer term as Brexit reduces the UK’s growth potential.”
Read: Pound to Euro Exchange Rate Forecasts: Better than 1.15 GBP / EUR Rates Target This Week
The debate on inflationary pressure in the US and the global economy has been boiling over the past two weeks and has had a major impact in the past 24 hours.
Yields on US bonds rose sharply, with the US 10-year yield at 12-month highs above 1.30%. The surge in yields also triggered a recovery in the dollar as the euro-dollar (EUR / USD) exchange rate retreated from 3-week highs above 1.2150 to trade below 1.2100 at 1.2075.
The dollar-yen (USD / JPY) exchange rate also recorded 5-month highs at 106.20 before correcting slightly.
Rodrigo Catril, senior FX strategist at National Australia Bank commented on the jump in yields; “The rise in yields has been driven by rising inflationary concerns amid rising energy prices coupled with the prospect of major US fiscal stimulus and the global recovery entering a firmer phase as the vaccine launch leads to reopening of the economies “.
Yukio Ishizuki of Daiwa Securities noted; “I think the dollar’s downtrend is over. At the beginning of the year, speculators were betting on a dollar drop below 100 yen. It seems they have now abandoned that view.”
UOB expects further GBP / USD correction to 1.3820 and added; “A break of 1.3820 (no change in the” strong support “level since yesterday) would indicate that the current strength of the GBP has run its course.”
Read: Pound to Dollar Rate Awaits Intense PMI Day, Euro Ends Lower – Today’s Exchange Rates 17.02.2021
UK consumer prices fell 0.2% in January with the year-over-year rate rising marginally to 0.7% from 0.6% and above the consensus forecast of 0.6%.
The underlying rate remained unchanged at 1.4% and slightly above market expectations of 1.3%.
The ONS noted that the furniture, home products, restaurants and hotels, food and transportation sectors had the largest upward contributions to the January 2021 12-month rate change, offset by the decline of clothing and footwear costs.
While there is significant market focus on inflation trends in the US, the impact of the data on UK inflation has been very limited.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, noted lower weightings for some service sectors; “This means any rebound in post-Covid service spending will not increase CPI inflation as much as we would normally expect. The base rate probably won’t go up that much this year. “
ING expects inflation to rise further in the near term, but does not expect a sustained move above the 2% target; “The bottom line for the Bank of England is a) inflation doesn’t bolster the reasons for pursuing negative rates in the fall, but b) it probably won’t also guarantee rate hikes / budget cuts until 2023 at the earliest.
Mid-market morning exchange rates – versus pound
GBP> AUD 1.79181 (-0.18%)
GBP> CAD 1.76527 (+ 0.01%)
GBP> CHF 1.2428 (+ 0.16%)
GBP> EUR 1.14965 (+ 0.09%)
GBP> NZD 1.93183 (+ 0.01%)
GBP> USD 1.38885 (+ 0.03%)