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RationalFX: lockdown rumours weaken GBP

RationalFX: The pound had rough start to the month yesterday as fears around a delay to the full relaxation of covid restrictions in England grew. Scotland has already announced a pause to their plans.

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Headlines have been dominated by an increase in ‘Indian variant’ cases and warnings from senior medical advisors around easing restrictions on June 21. This is all seen as detrimental to the previous positivity around the UK economy, following a successful vaccine rollout and the easing of lockdown to date.

However, Boris Johnson is insisting there’s nothing in the data to suggest an alteration to the current plan. Especially as there’s currently no substantial shift in hospitalisations.

June’s bumpy start is likely to be temporary. Alongside restrictions hopefully relaxing, analysts are starting to brief on a potential Bank of England interest rate hike by 2022. This reflects the view the central bank will be hiking rates sooner and faster than its peers abroad.

The usually dovish Monetary Policy Committee (MPC) member Gertjan Vlieghe even recently spoke about the reasonableness of a hike in early 2022. This was supported further yesterday as fellow MPC member Dave Ramsden stated the bank is not complacent and will push the rate up if necessary. The risk that demand moves ahead of supply may lead to enough inflationary pressure for a change in policy to become a reality.

EUR

Inflation in the eurozone rose sharply last month to 2% – just above the European Central Bank’s (ECB) target, outpacing its target for the first time since 2018.

This is an added complication to next week’s policy decision on whether to maintain the current ultra-loose stance. A jump from 1.6% is possibly enough to fuel anxiety of a faster winding down of last year’s vast monetary stimulus launched in response to the pandemic.

However, several policymakers think this surge is temporary and believe the current accommodative policy should remain. Wage growth weakened in the first quarter to 1.4%, leading them to suggest the above-target inflation is not long term. As with the UK, higher inflation is also linked to the commodity based price rises, and is less impacted by ECB policy.

Key announcements

18:10 – EUR-  ECB’s President Lagarde Speech

Source : ETFWorld.co.uk

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