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RationalFX: GBP stays strong as Covid cases fall

RationalFX: The pound made gains against the euro and dollar on Monday, reaping the benefits of a surprisingly dramatic improvement in the UK’s Covid situation.

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Confirmed cases have now fallen for the sixth consecutive day to 24,950 from 39,950 a week ago, shifting market sentiment back to risk on. This is a welcome development for risk sensitive sterling, which was trading on the back foot last week. Health officials had warned cases could soon surpass 100,000 a day.

Despite the fall, Covid hospital admission are rising. 5,055 people have been admitted in the past week, an increase of over 30%. The market doesn’t seem overly concerned though as there’s often a one or two week lag between cases and hospital admissions rising or falling. The assumption being that admissions should drop off soon too.

The decline in cases also helped the pound avoid any impact from dovish comments by the Bank of England’s (BoE) Jan Vlieghe. The policy maker said the UK should be cautious about raising interest rates to counter rising inflation. Speaking yesterday, Vlieghe warned the economy wasn’t out of the woods and had only partially repaired the pandemic’s damage.

Usually comments like this would be met with a fresh bout of sterling weakness. However, as Vlieghe will soon end his tenure as a BoE voting member, the market hasn’t placed much weight on his comments.

Despite that, an adjustment to monetary policy at the bank’s 5th August meeting remains unlikely. So far only two of the eight BoE policy makers have publicly supported tighter monetary policy.

Key announcements

13:30 – USD – Durable Goods Orders (Jun) expected 2.1% from 2.3% previous

13:30 – USD – Nondefense Capital Goods Orders ex Aircraft (Jun) expected 0.7% from 0.1% previous

Source : ETFWorld.co.uk

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