Sterling on the Rise


A risk-on mood has predominated in markets this week. Signs of improving economic conditions, and some positive reports about progress in developing a Covid-19 vaccine, has helped lift risk assets. Comments from a number of central bankers, including the chief economists of the Bank of England and the European Central Bank, noting that so far the economic rebound was proving to be stronger than-forecast may have added to the more upbeat mood. As a result of this, many equity markets have enjoyed their best week in a month. In contrast, government bond yields have risen modestly, although in most cases they are still some way below the near-term peaks reached in the first half of June. Meanwhile, in currency markets the US dollar has generally slipped including against the euro and the pound. Sterling also saw some gains against the euro although it remains some way from the peak above 1.1250 reached last month. Uncertainty about the UK’s future relationship with the EU remains a key issue for sterling. Talks between the chief negotiators broke up a day earlier than expected this week amidst mixed reports on progress. They will resume in the coming week. The past week has seen rises in Covid-19 cases in several countries. A number of Latin American countries have seen an escalation. In the US, several states have reported record numbers prompting some reversal of the easing in restrictions. In the UK, Leicester was put into lockdown again and here signs of a pickup in cases in some parts of the north, but nationally the numbers look more encouraging.

Meanwhile, following China’s passing of its Hong Kong national security law, the US announced some limited retaliatory measures. However, so far the escalation in geopolitical tensions seems to have had little impact on global markets.


The initial impact of the further loosening in UK restrictions will be a key focus in the coming week. From 4th July pubs, cafes, restaurants, museums and art galleries and a range of other businesses are allowed to re-open. Markets will be looking for a similar bounce in activity to that seen when non-essential retailers started to re-open. However, a key question is whether consumers will have the confidence to immediately start using leisure services. The other big event of the week will be Chancellor of the Exchequer Sunak’s update to the House of Commons on the economic outlook. In a speech earlier this week, PM Johnson said that the focus policy will be on stimulating economic growth and that there would be no early return to austerity despite the escalation in the government’s budget deficit. There has been considerable speculation that the Chancellor will announce measures to boost growth. However, Mr Sunak is reported to have been playing down the likelihood of immediate big tax cuts, including a temporary reduction in VAT. Instead the emphasis for now seems to be on more targeted measures to help sectors under particular pressure. The Chancellor is not expected to unveil any new economic forecasts this week. However, the Office for Budget Responsibility is scheduled to release a report on 14th July containing three economic scenarios for the UK economy. These are likely to form the basis for budget planning going forward


The coming week’s economic data calendar is very light, but there are a few timely indicators that will provide further indications on the speed at which economic growth in major economies is picking up. In the UK, the June construction PMI (Mon) is expected to match its manufacturing and services equivalents and post a second consecutive monthly pickup from April’s all-time low. We forecast a rise in the headline index to 46 (from 28.9 in May). That will still leave it below the 50 level that is supposed to signal expansion but there are indications that PMI data may be underestimating the pace of the turnaround in the economy. In the US, the June ISM non-manufacturing index (Mon) is also expected to post a sizeable pickup. Its manufacturing equivalent rose to a 15-month high of 52.6 in June and we expect a similar rise in the data for the largest part of the economy. We forecast a June outturn of 51.5, up from 45.4 in May and 41.8 in April. In the Eurozone, already released numbers for some of the larger economies point to a big increase in May retail sales (Mon) and we look for a 15% rise. Finally, German factory orders and industrial production in France, Germany, Italy and Spain (all for May) will show the extent of the initial rebound in manufacturing.

RBA ON HOLD FOR NOW In the coming week’s policy update, the Reserve Bank of Australia is predicted to leave monetary policy unchanged following sizeable easing moves in the first half of the year. The RBA has already noted that the economic rebound seems to be happening earlier and more quickly than was initially expected when the pandemic hit Australia. However, it is still likely to be wary of downside risks, particularly with signs of a renewed pickup in Covid-19 cases in some parts of the country. The RBA will probably also want to avoid inducing a further rise in the Aussie dollar. So it is likely to emphasise that monetary policy will remain very loose for a considerable period of time.

To discuss how the above may affect your money transfer requirements, please contact your Currency Dealer at Heritage Pay on +44 (0) 207 117 2934.

None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.

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