With the Brexit deal done, the pound’s narrative is being scripted by developments in the battle against the COVID-19 pandemic. As the UK enters lockdown 3.0, mounting concerns around economic stagnation and negative interest rates to help support the UK economy are dragging the pound lower. The Bank of England (BoE) slashed interest rates to a record low of 0.1% last year to cushion the initial economic blow from the pandemic. Having resisted making further cuts, the central bank said it is preparing the groundwork for negative interest rates – the next BoE Monetary Policy Committee meeting is scheduled for the beginning of February.
However, with the UK leading the way in the vaccination process, there is hope on the horizon. The Oxford-AstraZeneca vaccine rollout is part of the NHS’s biggest-ever effort and aims to offer jabs to 13 million people by mid-February – including all over-80s.
These opposing forces – combined with a largely downbeat dollar – have caused the pound to dollar rate to snake between the 1.35 and 1.36 levels this week – a subdued performance that has seen it suffer its first weekly decline in four weeks. This morning, the pair remained below 1.36.
Dollar Rebounds Thanks to Safe-Haven Buying
The dollar managed to rebound from concerns that the newly Democrat-controlled Senate will pave the way for possible larger fiscal stimulus under US President-elect Joe Biden – a scenario that analysts generally assume would be positive for economic growth globally, but negative for the dollar as the US budget and trade deficits widen further. Its gains were partly attributed to safe-haven buying in the wake of violence on Capitol Hill in reaction to Donald Trump’s election defeat.
Looking further ahead for the dollar, rising inflation expectations based on likely US government stimulus will weigh on real interest rates and could dent sentiment to the world’s most traded currency. Expectations that the Federal Reserve will stand still on rates and allow an inflation overshoot above 2% could compound the issue.
It’s been a quiet week in the UK economic calendar and today is no different. Over in the US, the data continues to come thick and fast – most notably Nonfarm Payrolls for December, which are forecast to drop to 100,000 in December from 245,000, potentially piling pressure on the dollar. Unemployment is expected to be unchanged at 6.7%. Other releases include Average Hourly Earnings and the Labour Force Participation Rate for December.
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