- Ending of Covid restrictions confirmed
- But beware souring of global market sentiment
- GBP/EUR tentatively supported
- GBP/USD struggles under USD outperformance
Picture by Andrew Parsons / No 10 Downing Street.
- Market rates at publication: GBP/EUR: 1.1708 | GBP/USD: 1.3885
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- Specialist transfer rates: 1.1620 | 1.3788
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The British Pound was underpinned by confirmation the UK government would proceed with lifting the majority of the remaining Covid restrictions on July 19, however shaky global market sentiment is said by analysts to be an emerging risk on the near-term horizon for the currency.
Domestically, despite rising Covid cases, developments are supportive of Sterling's valuations.
The UK government confirmed on Monday that all remaining Covid restrictions would be lifted on July 19, a development economists expect to result in higher levels of economic growth.
Granted, some guidance on face coverings and the return to workplaces will remain in updated form, but all those businesses currently still closed due to restrictions will effectively be allowed to reopen.
"On the basis of the evidence in front of us, we do not believe that infection rates will put unsustainable pressure on the NHS," Health Secretary Sajid Javid told the House of Commons.
Prime Minister Boris Johnson confirmed at a press conference all legal Covid restrictions would be scrapped but he urged people to "limit the close contact you have with those you do not usually live with" and to continue to wear face masks in crowded, enclosed place".
The decision means the economy is on course to recover more lost output even though the restrictions on international travel will inevitably make a full recovery unlikely in the foreseeable future.
"The further easing in restrictions will go some way to helping the UK’s economic recovery," says Nikesh Sawjani, an economist at Lloyds Bank Commercial Banking.
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While the decision comes amidst rising cases of Covid-19 in the UK the government believes the country's vaccination programme means these rising cases are unlikely to overwhelm the health system and result in a surge in deaths as had been the case pre-vaccine.
"An implicit calculation might be that the healthcare system is structurally under less stress in the summer than in the winter, so this seasonal pattern would warrant an 'acceptable level of hospitalisation' now, to balance against the economic – and political – risk of deferring once again the full termination of restrictions," says Gilles Moëc, Group Chief Economist at AXA Investment Managers.
Although the announcement is on balance supportive of the Pound there was no discernible market reaction to the announcement as the developments have been well signalled and therefore incorporated into the currency's valuations.
The Pound-to-Euro exchange rate nevertheless traded back above 1.17 through the opening session of the week and should data releases this week beat expectations further gains are possible.
The Pound-to-Dollar exchange rate was meanwhile unable to breach 1.39 amidst an ongoing recalibration in the Dollar's outlook, with numerous foreign exchange analysts we follow coming to the view that the Dollar's lows might be in.
"We do not expect the market to take any particular direction in the near term, we expect sterling to remain range bound this week. The reopening announcement has been highly telegraphed, thus, it should not have any market impact, in our view," says a weekly foreign exchange research note from Barclays.
Mark Haefele, Chief Investment Officer, Global Wealth Management at UBS AG, says more and more governments are likely to approach Covid-19 as being endemic, tolerating infections as long as mortality rates are modest and healthcare systems are not overwhelmed.
"The UK is en route to removing the last of its restrictions this month even as infections have spiked again," says Haefele.
However, for the Pound it could be global investor sentiment that trumps domestic considerations over the coming days and here risks appear to be building.
"Sterling will continue to be traded as a high beta DM currency; hence, it will remain particularly susceptible to the global sentiment," says Barclays.
A 'high beta' developed market currency is one that has a high sensitivity to investor sentiment: appreciating when stock markets are rising but falling when investors are selling.
"Given the heightened GBP sensitivity to market risk sentiment, we continue to view short GBP/USD as a useful hedge to spikes in risk aversion," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
Therefore, how stocks and sentiment evolve could be the key determinant of where the Pound ends the week.
Last Thursday provided a particularly poignant example of how the foreign exchange market is liable to react to shifts in investor sentiment: the Dollar, Yen and Franc rose as investors transacted into 'safe haven' assets amidst falling equity and commodity markets.
The Australian, New Zealand and Canadian Dollars, alongside Norway's Krone, were meanwhile the biggest losers.
The Pound sat in the middle of this risk scale: gaining against the commodity Dollars but falling against the safe-havens and the Euro.
"Concerns over worsening COVID-19 outbreaks in various parts of the world due to the highly-infectious Delta variant added to the negative sentiment in global markets last week," says Haefele.
Market nerves are particularly heightened over developments in China where it appears growth is slowing.
Chinese growth concerns were underpinned on July 09 when the People's Bank of China (PBoC) announced fresh stimulus in the form of a Reserve Requirement Ratio (RRR) cut.
The move is expected to result in around 1 trillion yuan ($154.19BN) being released into the economy.
While central bank stimulus is often regarded as supportive by investors, there are concerns that problems in China's banking sector might be brewing.
"My own view is that the main intention of this cut is to help banks with their capital and liquidity requirements," says Iris Pang, Chief Economist, Greater China at ING.
"This gives me a sense of unease. Are banks under stress? If this is the case, it implies there could be more bad loans," adds Pang.
She says this RRR cut is not a positive signal and volatility in the market could well increase.
Despite heightened nerves over the global rise in Covid-19 cases, UBS say they nevertheless remain constructive on the global economic outlook.
"We do not expect the Delta variant, or others, to disrupt the economic recovery in developed markets, although there is scope for a modest delay," says Haefele.