Sterling in limbo as optimistic economic data continues to flow but Indian variant fears also grow

Mon 7 Jun 2021
Posted by: William Barns-Graham
Features

currency

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Currency traders are waiting with bated breath for the government to decide whether it will go ahead with its plans to lift the final lockdown restrictions in the UK on 21 June.

Boris Johnson has denied that there is a need to delay the last stage of the UK’s reopening but said that more information is needed before a decision can be reached.

The usually confident PM has seemed more cautious after daily Covid-19 cases topped 4,000, with the so-called ‘Indian variant’ the now dominant strain in the UK.

Positive economic data

However, the week saw encouraging UK PMI (Purchasing Managers Index) data, which rose a to a 30-year high for manufacturing at 62.9 in May. Any score above 50 indicates growth.

The main cause for caution is a sharp rise in inflation, with businesses facing higher staffing costs, transport bills and prices for raw materials.

Pound in limbo

Anxiety over Covid cases meant the pound had a bad start to last week, opening at US$1.424 and €1.165 before dropping to $1.416 and €1.156 by the end of Monday.

The high PMI scores saw Sterling rally back to $1.418 and €1.164 towards the end of the week.

Fed’s inflation stance

The dollar also continued to struggle on the back of inflation fears, despite strong economic data – it was revealed that US gross domestic product (GDP) expanded at a 6.4% annual rate in the first quarter.

The Federal Reserve (Fed) has been insisting that inflation in the US was “transitional” but as last week progressed there were further signs that their stance is now changing.

New York Fed President John Williams said that while now is not the time to taper bond buys, a discussion is warranted. These comments were part of the reason for its slight improvement against the pound.

The week ahead

Eyes will be on the European Central Bank’s interest rate decision and accompanying speeches on Thursday.

The latest infection rates  in the UK will also be closely watched.

Economic data 

Highlights this week include:

Tuesday (8 June)

  • German industrial production data
  • Eurozone GDP

Wednesday

  • Chinese GDP
  • German trade balance

Thursday

  • ECB rate decision
  • USD Consumer Price Index

Friday

  • UK industrial and manufacturing production reports