Upgraded UK growth forecast puts wind in sails of pound, but Indian variant lurks in shadows

Tue 1 Jun 2021
Posted by: William Barns-Graham
Features

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Optimistic forecasts for UK GDP growth following the pandemic have led to a further strengthening in the value of the pound against the euro and US dollar.

The OECD (Organisation for Economic Co-operation and Development) sharply upgraded its view for UK growth, thanks to the success of the country’s Covid-19 vaccination programme.

GDP growth

It forecasts that UK GDP will rise by 7.2% in 2021 – an increase on March’s 5.1% prediction. This would represent the country’s fastest growth since 1941 and would outpace the recoveries of other advanced economies, including the US.

For 2022, growth has been revised significantly higher too – rising to 5.5% from 4.7% in March.

Nissan coup

There was more good news when it was reported that carmaker Nissan is in advanced talks with the British government to build a new electric car battery plant in the UK.

The government is also said to be conducting regular talks with Jaguar, Land Rover and newcomer Britishvolt.

Pound strengthens

The positive news and a speech from the Bank of England (BOE) policy maker, Gertjan Vlieghe, helped push the pound above US$1.42. 

Vlieghe, who is set to leave the Monetary Policy Committee in August, is one of the few BOE officials to speak publicly about interest rate rises.

He said that the bank is likely to hike interest rates well into next year, although it could come earlier if the economy rebounds quickly.

This caused the pound to strengthen against both the euro and dollar rising to €1.166 and $1.422.

Dollar suffers

The dollar continued to struggle due to the general ‘risk on’ mood in stock and commodity markets.

Federal Reserve (Fed) officials have remained adamant that inflation will run hotter than its traditional 2% goal and for a longer period than estimated as the global economy reopens, but this should prove temporary.

However, traders are unconvinced and are questioning whether the Fed has unleashed a beast that they can no longer control.

Lael Brainard, governor at the Fed, hailed the rapid economic recovery but re-reiterated that there is still a long way to go and that any inflation would be transitory.

German data boosts euro

Like Sterling, the euro climbed against the US dollar rising to $1.226.

This was in part due positive data from the German IFO Business Climate Survey last Tuesday.

The week ahead 

There is a sizeable amount of economic data to digest this week, including manufacturing PMI (Purchasing Managers’ Index) data, employment change, and jobless claims.

The biggest event of the week will be the US non-farm payrolls data report on Friday.

In the UK, one eye will be on the potential impact of the spread of the Indian variant of Covid on the proposed 21 June date for easing the final lockdown restrictions.

Economic data 

Highlights this week include:

Tuesday (1 June)

  • Australia interest rate decision
  • German retail sales data
  • German unemployment report
  • Eurozone PMI manufacturing
  • UK PMI manufacturing
  • Eurozone Consumer Price Index (CPI)
  • Canada GDP

Wednesday

  • Australia GDP
  • Eurozone PPI (Producer Price Index)

Thursday

  • German PMI services
  • Eurozone PMI services
  • UK services PMI
  • US PMI 

Friday

  • Eurozone retail sales data
  • US earnings
  • US unemployment rate/non-farm payrolls data
  • US factory orders 
  • Canada unemployment rate