Pound to Dollar Rate Subdued by Britain’s Pandemic Woes

The pound to dollar rate started 2021 at its highest level since 2018, after the UK and EU got a post-Brexit trade deal over the line just before the transition period expired. Since then, however, Brexit headlines have died down, handing the sentiment baton onto the battle against COVID-19. So, as the new week dawned, which opposing element of the pandemic would have most influence over the pound: optimism generated by the mass vaccination rollout or uncertainty caused by the relentless surge in infection rates? The latter appeared to sink its claws into the UK currency yesterday – dragging the pound to dollar rate below the 1.35 benchmark.

The UK government is considering tightening restrictions further after COVID-19 hospital cases hit a fresh record high over the weekend – and the UK death toll passed 80,000. The prospect of more draconian measures and a deteriorating outlook for the economy has led economists to predict a double-dip recession – a gloomy forecast that was given added weight by a poll of polls which suggested UK business output continued to decline during the traditionally busy December period.

Bank of England (BoE) MPC member, Silvana Tenreyro said yesterday that negative interest rates could boost the UK economy by more than expanding bond purchases – a view that splits opinion amongst the Bank’s monetary policymakers. Her comments were made against a backdrop of severe economic headwinds caused by the new surge in COVID infections. The BoE is currently assessing the technical merits of negative rates for the UK’s financial system – and is expected to publish its views after February’s policy meeting.

US Dollar Regains Lost Ground

The safe-haven dollar recovered some of its losses yesterday as the global COVID-19 pandemic worsened – rebounding from bets that the Democratic Party’s control of Congress will trigger more stimulus for the US economy, feeding inflation. It was also lent support by statements from several Fed officials, who indicated that the central bank could reduce bond purchases “sooner than people expect if the economic recovery proved stronger”.

The dollar rally is expected to be short-lived, however, if inflation expectations continue rising and interest rate speculation points towards them remaining low for the foreseeable future.

Looking Ahead

It’s speeches, not data that dominate the economic calendar today. BoE MPC member Dr Ben Broadbent will be providing his take on UK monetary policy this morning. Meanwhile, Raphael W. Bostic, President and CEO of the Federal Reserve Bank of Atlanta, will be providing a similar summary of the state of play in the US. Feel free to get in touch using the form below to ask a question about your upcoming transfer and the factors in play that could impact it.

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