As starts to the week go, yesterday was a flyer for the pound, which briefly broke through the 1.37 barrier against the dollar for the first time since 2018. The Monday blues soon kicked in, however, as the pair slid back where it came from – starting today just below the 1.36 level.
The pound to dollar rate has climbed steadily higher over the last couple of weeks after the UK-EU trade pact was announced and approved, but attention now centres on the fight against the rapidly spreading coronavirus – and the economic repercussions of stricter lockdown measures announced yesterday. All eyes are on the effectiveness of the vaccine rollout, which will drive sentiment towards the pound in the coming weeks.
The pound’s impressive start to the week was aided by the IHS Markit/CIPS manufacturing Purchasing Managers’ Index for December. This gauge of growth in British manufacturing activity rose to its highest level since November 2017, as factories worked round the clock to complete orders before 31 December – the end of the post-Brexit transition period.
This surge in manufacturing activity could be short-lived, however, according to IHS Markit director Rob Dobson: “Customers, especially those based in the EU, brought forward purchases, boosting sales temporarily. It seems likely that this boost will reverse in the opening months of 2021, making for a weak start to the year”.
Dollar Finds Some Safe-Haven Support
The broad dollar downtrend from 2020 has seeped into the new year and looks set to persevere as upbeat risk sentiment limits the dollar’s safe-haven appeal – providing underlying support for the pound vs dollar rate. A combination of record-low US interest rates, huge US deficits, and a belief that rebounding world trade will drive riskier currencies higher, has hamstrung the dollar of late.
However, the dollar finally managed to find some respite in its safe-haven status yesterday, as surging global coronavirus cases undermined bullish sentiment across global markets that had sent investors flocking into riskier currencies.
Looking Ahead
It’s a barren day in the UK’s economic data calendar. In contrast, it’s all systems go in the US; the pick of the bunch being the ISM Manufacturing Purchasing Manager’s Index (PMI) for December, which is forecast to fall slightly lower.
Investors will also be monitoring a speech by John C. Williams – the president of the Federal Reserve Bank of New York – for clues of future monetary policy action from the central bank.
