In the past, the pound tended to appreciate during periods of high investor sentiment and strong stock market performance, and now that Brexit has faded from the market’s attention and is no longer a concern, this “practice” appears to be returning. The pound quietly broke through the psychological barrier of 1.37 against the dollar on Wednesday, and continued to maintain its gains on Thursday. Careful analysis down, the pound’s recent pleasing trend behind, there are three major “pushers”, Gold ten below for you to analyze one by one.
1, the pound rose and the United States stimulus plan prospects linked
Investors look forward to the Biden administration to introduce a strong anti-Epidemic relief program, for the U.S. economic growth and stock market rally to provide support, so market optimism is high. It can be said that the current trend of the pound is closely related to the economic development of the United States.
The latest movement in the pound may indicate that its drivers are shifting from Brexit-related issues to broader market sentiment. Jeremy Thomson-Cook, chief economist at Equals Money, said.
“A general rise in risk appetite has supported the pound. We are pleased to see this and hope that the correlation between the pound and risk will be maintained, as a stronger recovery in the global economy could be countered by a stronger pound.”
Don’t get too happy though. Although the Biden Administration has proposed a $1.9 trillion “U.S. rescue plan,” but it must first be passed by Congress. Jim O’sullivan, chief U.S. macro strategist at TD Securities, said.
“We remain skeptical that the final size will be much larger than $1 trillion, as passage of the aid package will likely require the support of at least 10 Republican senators.”
O’sullivan explained that Democrats may choose to bypass Republicans and initially implement parts of the “rescue” plan through “Budget Reconciliation” (Budget Reconciliation), but most of the spending plan must be funded through an appropriations bill, which would need to follow the Senate’s “obstruction of proceedings” rules.
If the $1.9 trillion stimulus package is not passed in its entirety, market disappointment may follow, and declines in the stock market and other “risk assets” (such as the British pound) are likely to become a reality. Nevertheless, expectations for the Biden administration are still high, and Yellen as Treasury Secretary is seen as a hope for generous spending, and it can be expected that the next few years will see massive spending and continued ultra-low interest rates in the United States.
2, the UK vaccination “rush” EU United States, the Bank of England will set the tone?
In addition to the United States, there are still other factors that can avoid a sharp fall in the pound, or even let the pound’s rise continue, the first is the launch of the vaccine.
Mark Haefele, chief investment officer of UBS Global Wealth Management, said.
“We expect pro-cyclical currencies such as the euro, the pound and commodity-producing currencies to benefit from the expanding economic recovery, supported by the vaccine rollout.”
As of Wednesday, more than 5.07 million doses of the vaccine had been administered in the U.K., and vaccination efforts are well underway. Forecasts show that to reach the vaccination target by mid-February, about 350,000 people must receive their first dose of the vaccine each day. The target is expected to be reached before the embargo can be partially lifted, which would make the U.K.’s economic recovery more resilient.
Argentex Group analyst Joe Tuckey said.
“The popularity of the pound has improved, the UK vaccinations are commendable and the post-Brexit outlook is at least clearer. With the epidemic still dominating market sentiment and the UK rolling out vaccines much faster than other European countries, the pound will be firmer in relative terms, although the ‘ghost’ of the Bank of England’s lurking negative interest rate policy could limit the pound’s gains.”
He added that in the medium term, all eyes will be on the Bank of England’s Feb. 4 meeting, when the interest rate debate will take place and attention needs to be paid to how the BoE seeks to balance the short-term challenges and the vaccine-driven recovery.
3, bullish on the UK recovery prospects, there is a reason worth 150 billion pounds
Secondly, the December Inflation data is the most direct catalyst for the strengthening of the pound. UK CPI rose 0.6% in December from a year earlier, slightly above economists’ expectations, compared with a 0.3% rise in November. The higher inflation rate makes it unlikely that the Bank of England will lower interest rates further. In fact since the end of last year, traders have mostly lifted their bets on the Bank of England to implement negative interest rates.
In addition, the embargo, which limits opportunities to spend, and the UK government’s unprecedented income protection scheme have caused the savings rate of UK residents to soar to a record high in the second quarter of 2020 and has remained high for three consecutive quarters.
Surprisingly, the vast majority of savings have been deposited in deposit accounts, with the volume of deposits increasing by nearly £150 billion ($205 billion) since the end of 2019.
According to research from Bloomberg Economics, this should mean that once enough people are vaccinated and the embargo lifts, pent-up consumer demand will be vented and the U.K. economy will rebound quickly.
Savvas Savouri, chief economist at Toscafund Asset Management, said.
“These savings are like squeezed springs that when released will help inflation return to 2%.”
To sum up, the market tone of the pound has been “cloudy to sunny”, the Bank of England also seems to be in no hurry to offer negative interest rate weapons, but how far the pound can go, but also to the three “pushers” to say it.
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