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Positivity in the UK doesn't do enough to support the pound

GBP - British Pound

Last week failed to see a positive reaction from the pound, despite strong data. Retail sales and PMI data both posted better than expected figures, with retail sales posting a 5.4% month on month increase in March when only a 1.5% increase was expected. Manufacturing, services and composite PMI’s climbed above 60 in April, which is the first time we have seen this posting in more than a year for the pound. This type of data indicates that the UK, with its strong vaccine roll out programme, is well and truly back on the road to recovery, and displaying a stark contrast to events in the Eurozone, though the pound couldn’t be buoyed by this positive news. Instead it was the US dollar weakness that gave GBPUSD the direction it took up to 1.40 last week.

Key Movers

The US dollar is at a very strong start to this year, being one of the strongest performing G10 currencies for the first quarter of 2021. However, April has seen a reverse in fortunes for the currency, with investor confidence in the currency down and a sell-off in the currency clearly evident. Most of this recent sentiment has been driven by the recent comments from Jerome Powell and the Federal Reserve, who has stated that they are committed to keeping monetary policy as loose as possible for as long as possible. Until this rhetoric shifts, we could expect treasury yields and the US dollar to remain weak. This could well and truly happen this week, with the Federal Reserve’s monetary policy announcement and first quarter GDP report scheduled for release in the US.

Much like the recent story in the UK, US data has been incredibly buoyant, with strong Markit PMIs, robust new home sales and a sharp rise in average prices of homes. In light of these reports, it may prove difficult for the Federal Reserve to convince the market that rates won’t increase until 2023. Other central banks have already made U-turns on their forward looking rhetoric during the pandemic, and there is expectation the Federal Reserve may have to do the same, which could bring us US dollar strength once again.

The three greatest risks for the US dollar this year are taxes, recoveries abroad and unexpected vaccine concerns. Two weeks ago, when the CDC and FDA, two medical regulators in the US, suspended the use of the Johnson & Johnson vaccine, the US dollar sold off across the board. Biden then added fuel to this fire by stating that there would need to be significant tax hikes.

The Euro has seen some renewed strength, particularly against the US dollar, with Friday’s strong Eurozone PMI data helping to drive this rally. It has become very clear that despite rising virus cases and widespread lockdowns, the Eurozone recovery is gaining momentum, with positive data from France and the region as a whole. Germany showed some small signs of slipping, but overall the news was taken as positive for the bloc. The PMI data was the highest we have seen since July of last year with consistent postings above 60 across manufacturing and services. This week sees Germany’s IFO report out on Monday, and will be watched closely for signs of strong business confidence as we get ourselves out of this pandemic

Expected Ranges

GBP/EUR: 1.1460 - 1.1545 ▲

GBP/USD: 1.3860 - 1.3980 ▲

EUR/USD: 1.2055 - 1.2125 ▼

GBP/AUD: 1.7790 - 1.8010 ▼