Get more for your money - navigating currency markets in 2021
By Jeremy Thomson-Cook, Chief Economist at Equals Money
9 March 2021
Jeremy shares his thoughts on how businesses and those advising them can best prepare to bounce back from an unpredictable 2020.
Offering financial advice and guidance can be challenging enough at the best of times, throw a global pandemic and the UK’s departure from the EU into the mix, and you’ve got quite a mountain to overcome.
Although we’re not in the clear yet, 2021 has certainly started on a positive note as vaccine rollouts worldwide gather momentum and normal life slowly begins to emerge. With that in mind, now is the time to look ahead at what the rest of the year has in
store for major currency markets.
GBP
The services sector, which dominates the UK economy, is counting down the days until April when hospitality is due to reopen, albeit in limited capacity. This will be a key milestone for GBP as the key factor in restarting its most important industry is enabling closer social interactions.
With vaccine milestones also being consistently passed in the UK, government focus is shifting from health to wealth and changes that need to be made to the government’s fiscal position to put spending on a more sustainable pathway. The most recent Budget has shown that taxes will rise in coming years in a bid to rein in government spending.
Last month the Bank of England maintained its stance of ultra-low interest rates and for the time being a move into negative interest rate territory seems unlikely despite the central bank’s unwillingness to rule it out.
What does this mean for sterling?
As we expected, early signs this year indicate a move higher in GBPUSD. This can be attributed to the early stages of a cyclical move lower in the USD, despite our belief that the pound will underperform on a trade-weighted basis. However, gains against most other currencies for GBP will be hard to come by, especially the euro.
EUR
Markets reacted well to the fiscal and monetary policy support offered to both businesses and consumers as the Eurozone has come together over the last few months of the pandemic, providing a launchpad for the euro ahead of a (hopefully) smoother 2021.
Once that support kicks in for businesses, and consumer confidence grows alongside a return to normal life, there will no doubt be a pick-up in global trade which will help improve the Eurozone’s growth prospects. Politically, 2021 is also shaping up to be much quieter than it has been for several years.
How high could we go?
After some initial hold ups from Hungary and Poland, the Eurozone got through stimulus plans that have been heralded as some of the better reactions to the pandemic, strengthening the single currency in early 2021.
We think that the euro’s main pairs of EURUSD, EURGBP and EURCHF will likely see the euro outperform, with it losing ground against its nimbler cousins in Scandinavia and the emerging market, but only if the EU is able to sort out its vaccine program which is delaying expectations of a speedy recovery from the pandemic.
USD
The dollar is strongly, negatively correlated with global growth. This means that we can expect the dollar to push lower as the world around it begins to reopen. That being said, US businesses struggled with international relations under the Trump administration and a calmer stewardship of trade with President Biden should boost corporate profits in coming quarters.
Under a Biden administration, spending will also gradually rise which, thanks to a now Democratic Senate, won’t be as much of a battle as initially feared, with the likes of tax hikes expecting to be passed.
Where does the dollar turn?
If the US is looking for stimulus, it may have to turn to the Federal Reserve to do some of the heavy lifting, offering another route to a lower dollar. The appointment of former Fed Chair Janet Yellen as Treasury Secretary will help matters.
In a world of relative returns, if the UK, Asia or the Eurozone are able to turn the corner on a recovery from the pandemic faster than the US, driven by appropriate stimulus spending locally, then we would expect the dollar to lag GBP, EUR and some emerging market currencies moving forward.
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