Sterling was unmoved by today’s release of the roadmap to the recovery, with much of the announcement leaked prior to the Prime Minister’s formal statement.
It was widely signalled this morning that schools are set to reopen on March 8th, and outdoor gathering limits eased along with outdoor sports facilities opened on March 29th. However, the official release saw the government outline additional phased steps to reopening the economy, which isn’t only spaced out in five week intervals but is also subject to undisclosed data targets being achieved. These are based on; the success of the vaccine rollout, the number of hospital admissions and deaths falling, the amount of pressure on the NHS, and the impact of any variants.
Sterling’s lack of reaction is telling…
Most of the short-term boost to the economy, driven by the reopening of schools, has already been priced in ahead of time as the pound enjoyed the aggressive vaccination programme underway in the UK. Despite additional clarity being offered to the macroeconomic outlook today, subsequent stages of reopening are subject to large degrees of uncertainty, with their viability determined by the progression of Covid-19 data.
This uncertainty has capped the pound’s rally for now, with additional upside reserved for when the data makes the next stage of reopening a viable possibility. The emphasis now swings to the March budget.
With much of the services sector closed until mid-Q2 at a minimum, an extension in the furlough scheme beyond March 31st is inevitable. It is likely that the budget will provide a gauge on how optimistic the government is with reaching its stages of reopening, while questions on how the UK government chooses to wind down the level of labour market support and consolidate its ever-growing pile of debt will draw focus for markets.
With so much uncertainty still in the frame for sterling, we don’t expect major idiosyncratic moves in the currency ahead of the UK budget on March 3rd.
The path to reopening remains tepid, while incoming economic data is likely to fall to the wayside as FX markets continue to fixate on the light at the end of the tunnel. Therefore, sentiment is likely to be the largest driver. Whether sterling can hold onto multi-year highs against the dollar amid an environment of rising US yields and maintain its spread over the euro will be telling in the coming weeks.
GBPUSD is still driven by broad USD dynamics despite Johnson’s roadmap to recovery being released
Author: Simon Harvey, Senior FX Market Analyst