Volatility was the name of the game for the pound yesterday morning. Having plummeted below the 1.36 benchmark against the dollar for the first time in over two weeks, it quickly regained its footing before jumping sharply. Providing the spring higher was the same thing that had held it back earlier in the day: the Bank of England’s (BoE) latest interest rate decision.
The pound swapped fears of sub-zero rates for relief after the central bank’s monetary policy committee voted unanimously to hold its policy rate at 0.1 per cent – also opting to keep the size of its bond-buying programme the same. However, the BoE did leave the door ajar for negative rates within six months if the flatlining economy does not improve. The pound to dollar rate almost bumped its head on the 1.37 resistance level upon hearing the news, before settling at a steadier pace.
Despite finding welcome support from Brexit and vaccine tailwinds this year – a welcome combination that triggered multi-month highs – the pound’s progress has been stalled by the ongoing lockdown and weakening business activity. So, it came as little surprise when the BoE used its accompanying statement to highlight that: “The outlook for the economy remains unusually uncertain,”. The gloomy outlook went from bad to worse when the Bank downgraded its earlier prediction for economic growth, instead forecasting that GDP will shrink about 4 per cent in the first quarter of this year.
Mixed data for the dollar
Wednesday’s encouraging payroll and services sector data – both of which pointed to an improvement in the US economic outlook – continued to support the dollar yesterday morning. However, Thursday’s releases were more of a mixed bag, with the latest Labor Department nonfarm productivity report revealing that US worker output fell at its steepest pace since 1981 in the fourth quarter, while US factory orders beat expectations in December.
Joe Biden is prepared to press ahead with plans to pass the $1.9 trillion economic relief plan without significant support from Republican lawmakers, who believe it to be too large – a move that is likely to support the dollar. Earlier in the week, the president gave short shrift to Republican senators proposed $600 billion stimulus plan.
Looking ahead
The dollar faces a significant test today when the influential non-farm payrolls data hits the headlines. The data will help confirm if the world’s largest economy shrugged off a dip in growth towards the end of 2020.
