British Pound Sinks to New Multi-Week Lows Against Euro and Dollar as Global Pandemic Reaches Next Stage
– Global pandemic nervousness hits markets
– British pound collapses on deteriorating sentiment
– Subject to losses against EUR and USD
– Haskel sinks expectations of rate hikes
Above: Prime Minister Boris Johnson gives a press conference on Covid-19. Still courtesy of 10 Downing Street.
- Market rate at publication: GBP / EUR: 1.1593 | GBP / USD: 1.3660
- Bank transfer rate: 1.1368 | 1.3480
- Specialized transfer rates: 1.1510 | 1.3664
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The British pound has been sidetracked by the dollar, euro and other so-called safe-haven currencies amid a sell-off in global equity and commodity markets.
The declines came as investors realized that the pandemic is entering a new phase that will inevitably see another wave of infections sweeping the world, driven by the Covid-19 Delta variant.
The pound declines came on the same day the country saw all restrictions relaxed, although a spike in Covid-19 cases in the country has meant hundreds of thousands of workers have been forced to leave. isolate.
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The UK appears to be way ahead of its major developed peers in this next wave of the pandemic and what worries investors is that even a heavily inoculated country like the UK can succumb to a wave of the virus.
“Concerns now revolve around the fact that global growth has peaked amid persistent supply constraints and the spread of the highly transmissible Delta variant of SARS-CoV-2 in countries / regions with low rates of disease. vaccination. , says Erick Martinez, analyst at Barclays.
The transmissibility advantage of the Delta variant over other versions of the virus means that vaccinations alone will not result in ultimate herd immunity to the pandemic.
This is because most societies have vaccine refusniks in the adult population, which, when combined with children, means that no population is likely to reach the threshold required to defeat the virus without natural infections.
“Markets appear to be grappling with fears that the virus might go away despite widespread vaccinations in major economies. New, more resilient mutations could be a perennial phenomenon that is wreaking havoc, especially in developing countries, ultimately keeping a cover on the recovery, ”says Marios Hadjikyriacos, senior investment analyst at XM.com.
Above: GBP / EUR (blue) and the FTSE 100 (orange).
“The pound sterling is also under great pressure due to its high correlation with the stock markets,” adds Hadjikyriacos.
The pound-euro exchange rate fell to its lowest level since early June, when it hit 1.1572.
The pound-to-dollar exchange rate fell to its lowest level since February, when it hit 1.3662.
But while the pound succumbed to the euro, dollar, yen and franc, it found itself better supported by other “high beta” currencies such as the Australian, New Zealand and Canadian dollars as well as emerging market currencies.
Indeed, these so-called commodity currencies and high yield currencies tend to be more sensitive to investor sentiment.
When the markets sell, they tend to lose more ground than the pound sterling.
Above: Delta variant increases cases in other major economies.
The outlook for global foreign currencies therefore depends on how long this current fear period is, at least until the Delta variant is on easing.
If the market enters a more pronounced bearish trend, the Pound could lose ground against the Euro and the Dollar, but gain against the high yielding currencies and commodities mentioned above.
But there are also UK specific concerns that could weigh on the pound sterling.
A growing number of British workers are forced to isolate themselves by NHS Covid-19 app, which alerts users to having been in close contact with someone with the virus.
“This” pingdemic “has left boards of directors and companies, including CBI and Marks & Spencers, calling on the government to change policies surrounding requirements when pinging to avoid massive staff shortages, and the huge economic impact that this ping attack has already triggered, “says Chris Biggs, partner at Theta Global Advisors.
Some estimates suggest that more than a million people have been asked to self-isolate as a result of this contact.
The ripple effect has put a strain on businesses and utilities due to staff shortages due to self-isolation rules.
The developments point to a largely unexpected blow to the economy that will come just as the UK was expected to reach speed to exit the restrictions of the pandemic era.
“Although restrictions have been relaxed, the fact that Covid is so prevalent in the country is eliciting the kind of caution that could inhibit the exact economic activity encouraged by the government,” said Joshua Mahony, market analyst at IG.
The pound rose against other currencies until 2021, as the UK economy began to recover and data beat expectations.
Should the incoming data over the next few weeks disappoint, the pound could be subject to further weakness.
Risks weighing on the outlook led a member of the Bank of England policy committee to say it was too early to consider raising interest rates and ending quantitative easing, even though the economy appears to be recovering quickly.
Jonathan Haskel, an external member of the Bank’s Monetary Policy Committee (MPC), said the rise of the Delta variant of Covid-19 combined with the end of government support programs in the coming weeks means the Bank must remain cautious and keep its generous parameters in place. .
“The risk of a preventative monetary tightening reducing the recovery continues to outweigh the risk of a temporary period of above target inflation. For the foreseeable future, in my opinion, restrictive policy is not the right policy, ”Haskell said.
In an online webinar at University of Liverpool School of Management Haskel was optimistic, however, that the economy would not suffer lasting damage due to the Covid-19 restrictions and the outlook for the labor market has improved significantly in 2021.
But its downright stance at the risk of ending monetary support will disappoint those hoping for a stronger pound.
Sterling rallied last week after two of Haskel’s colleagues Michael Saunders and Dave Ramsden said the prospect of inflation remaining above the 2.0% target for a period extended meant that the time to reduce monetary support was approaching.
Their appeals were greeted by a stronger pound.
But Haskel’s intervention reminds us that the Bank could remain a headwind for the currency for some time yet and that the market has not yet fully embraced the idea that the Bank of England will be one of the first players. on interest rates.