Published: April 16th, 2021
The British pound has had a difficult few days, losing ground and posting new seven-week lows against the euro as it battles to hold onto gains secured during the first three months of 2021.
Sterling has been hit by a mix of widely-distributed euro buying and the announcement that Andy Haldane, the popular Bank of England Chief Economist, is set to depart the BoE’s influential Monetary Policy Committee, where he had been a strident voice for optimism on the UK economy and a promoter of higher interest rates.
Sterling saw a selloff at mid-week in response to the news. Haldane's reputation as an interest rate 'hawk' inside the Bank of England made him an influential voice in currency markets. A hawk in finance lingo is someone who supports raising interest rates. Haldane’s enthusiasm for an interest rate hike was based on optimistic forecasts for a UK growth rebound later in the year.
Forex strategists at Deutsche Bank in London said in a note to investors that because Haldane was the biggest hawk on the BoE policy committee, his leaving the role constitutes a ‘material development’, one that could signal a potential shift in the monetary policy committee’s stance on interest rates depending on who replaces him.
Markets typically associate 'hawkish' central banks with currency strength, so some economists have seen the news of Haldane's leaving as a key factor behind an extended bout of Sterling exchange rate weakness.
Economists at Berenberg Bank told clients this week that both pound and bond yields dropped slightly on the news, suggesting that markets expect a dovish policy tilt at the UK central bank once Haldane departs. 'In our view, this is a sensible assessment of where future bank policy on interest rates is likely to go.’
Haldane's views on the economy were seen as an influencing factor helping drive bouts of Sterling strength last month, particularly his contention that markets and economists might be mistakenly underplaying the role looming inflation might play in the UK economy.
When inflation is on the rise and economies are seen as ‘overheating,’ a strengthening currency can be a side-effect of rapid growth and spiking demand. Central banks typically raise interest rates to slow currency appreciation and reduce the impact of a too-strong currency on exports.
Markets had judged Haldane’s stance as more hawkish than policy committee consensus, and some worry that the BoE could now drag its heels when reacting to future inflation risks.
Both Deutsche and Berenberg are advising clients that forex markets will have to look again and re-assess the BoE’s policy committee tilt after the new chief economist takes his or her place.
For now, analysts believe decision-making at the Bank of England on monetary policy will stay the current course. Threadneedle Street is expected to complete the asset purchases it committed to by December, which is consistent with the BoE’s latest guidance.
Next year the bank will likely detail an exit strategy from its current ultra-easy policy stance and look to raise the bank rate in 2023. If there are upside surprises in terms of UK inflation and economic performance, a hike could come sooner, perhaps at the end of 2022.
ING forex strategists told Bloomberg on Wednesday that they see any negative impact on the pound from Haldane's departure as being short-lived.
‘As no imminent BoE interest-rate tightening was on the table, despite being the bank’s big inflation hawk, his leaving shouldn't affect sterling’s prospects in the coming months.
Another factor in sterling’s tumble is broader demand for the euro, which is a dominant theme affecting forex markets globally. It's partially behind the lower pound-to-euro (GBP/EUR) exchange rate seen this week.
Declines in GBP/EUR lie in sharp contrast to the relative stability seen in the pound-to-dollar rate (GBP/USD).
The euro-to-dollar rate (EUR/USD) has also been on the up and rose back above the 1.18 level at mid-week, adding more proof of the single currency's short-term attractiveness to investors.
The single currency looks to have found favour with international investors as the Eurozone’s vaccination rollout finally kicks into gear. Improving prospects for continent-wide inoculation could mean that European economies won't be far behind the US and UK when the expected bounce-back from pandemic commercial restrictions finally occurs.
After a dire beginning marked by extended delays and an apparent inability to procure enough vaccine, key Eurozone countries like Germany, Italy, and France all reported rising vaccination rates this week.
France said it had finally sped up its widely-criticised coronavirus vaccination programme on Monday, narrowing the gap between injections of the vaccines from Moderna and Pfizer to get to a level of basic protection for the population quickly. France also simplified the qualification criteria, making the AstraZeneca/Oxford vaccine available to anyone over 55.
France confirmed injection of more than half a million doses last Friday alone. In Germany, the number of people getting their first jab leapt by more than 25 per cent within a week to reach 12.6 million.
Economists at Société Générale told the Financial Times that in the absence of any new backlash against vaccination and no further difficulties procuring vaccine, inoculation of all high-risk people by the end of April was achievable, as well as 70 per cent of all European adults.
A rebounding euro could signal a return to form after a first-quarter marked by underperformance, suggesting enthusiasm could fade after markets absorb the news.
And all’s not gloomy for the pound. Analyst at Citi say Sterling is well placed to come back and continue the outperformance seen earlier in 2021, especially against the euro.
‘Westminster’s economic reopening plans remain on track, while Europe’s plans are still in question.’