22 January 2021

British Pound Spikes on Brisk Vaccinations

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News shaping
the markets today

     

What’s happening: The British pound moved higher on Thursday to record gains versus the US dollar and the euro.

What happened: The sterling hit a new two-and-a-half year high versus the greenback, while climbing to a fresh eight-month peak versus the euro. Sentiment was lifted by hopes of a faster rebound in the UK economy, given the brisk pace of vaccinations in the country.

Meanwhile, ECB President Christine Lagarde issued a warning about renewed increases in covid-19 cases in the EU.

Why it matters: With Brexit related issues already priced in, the British pound has again been rising every time the markets perform well and there is an improvement in investor risk appetite. Over the years, the sterling has exhibited a strong correlation to the overall markets, delivering a strong performance when there is a broad-based rally and moving lower during broader market selloffs.

Investor sentiment this week has largely been positive, with the Democratic wave in the US and the easing of protests by outgoing President Donald Trump’s supporters. With the new US President being sworn in, the government is now widely expected to approve Joe Biden’s massive covid-19 relief package, which would propel economic growth.

The UK continues to increase the pace of its vaccination drive, administering more than 5 million doses by Wednesday.

The GBP/USD pair was also supported by weakness in the US dollar on expectations of the $1.9 trillion stimulus package being cleared. The US dollar index, a measure of the greenback’s performance versus six major currencies, settling lower at 90.13 on Thursday, after reaching around a one-month high on Monday.

The British pound also gained versus the euro, breaching the 1.1280 resistance level. The euro lost steam as the central bank kept its interest rates unchanged on Thursday and ECB President Christine Lagarde said the region could witness another spike in covid-19 infections causing renewed restrictions. Germany has already extended its lockdown till mid-February.

Investors supported the British pound despite the UK releasing disappointing economic data on Thursday, with a decline in business optimism in the first quarter and factory orders also falling by a higher-than-projected rate in January.

What to watch: Investors await various economic reports from the UK, including retail sales, public sector net borrowing, manufacturing PMI and services PMI. Retail sales in the UK, which declined 3.8% month-over-month in November, is likely to grow 1.2% in December. The IHS Markit/CIPS UK manufacturing PMI is expected to ease to 54 in January, from 57.5 in December, while the services PMI is projected to decline to 45, from a prior reading of 49.4.

Rising covid-19 cases remains a major concern, with total global cases exceeding 97 million.

The Markets Today

     

US stocks will be in focus today ahead of a basket of economic reports scheduled for release later in the day.

Context: Wall Street recorded gains on Thursday, with the Nasdaq surging to another record high on expectations of a strong round of tech earnings next week.

Details: Wall Street stock indices settled at record highs on Wednesday as President Joe Biden took office, fuelling hopes of an improved covid-19 vaccine rollout in the country. Some Wall Street experts also expect Biden’s pandemic plans to further boost the equity markets in 2021.

Investor sentiment has also been lifted by expectations of the Biden administration’s $1.9 trillion covid-19 relief bill being cleared by the Congress. Sentiment improved further when the US Labor Department released upbeat data on initial jobless claims. Individuals applying for unemployment benefits for the first time declined to 900,000 in the week ended January 16, versus the consensus estimate of 925,000.

The tech-heavy Nasdaq 100 surged 0.82% to close at 13,404.99 on Thursday, with Apple’s shares climbing over 3% after Morgan Stanley analysts projected a record quarter for the iPhone maker.

The S&P 500 rose 0.03% to 3,853.07, while the Dow Jones index bucked the trend and slipped 0.04% to 31,176.01 following a volatile trading session on Thursday.

What to watch: Following the release of strong jobless claims data on Thursday, markets await a basket of economic data from the US, including manufacturing PMI, services PMI, and existing home sales. The IHS Markit manufacturing PMI is expected to decline slightly to 56.5 in January, from 57.1 in December, while the services index is projected to drop to 53.6 from the previous reading of 54.8. Sales of previously owned houses, which declined 2.5% to 6.69 million units in November, is expected to decline 2% in December.

Other Markets: European trading indices closed lower on Thursday, with the FTSE 100, German DAX 30 and French 40 down by 0.37%, 0.11% and 0.67%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

France’s services PMI, manufacturing PMI and composite PMI, Germany’s services PMI, manufacturing PMI and composite PMI, Eurozone’s manufacturing PMI, services PMI and composite PMI, Italy’s construction output, India’s foreign exchange reserves, Argentina’s leading economic index, Brazil’s federal tax revenues, Canada’s retail sales as well as the US EIA’s natural gas stocks, crude oil inventories and Baker Hughes crude oil rigs.

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