Sterling traded close to recent highs on Thursday benefitting from news that the UK are leading Europe on rolling out its COVID-19 vaccination programme whilst expectations of an imminent interest rate cut from the Bank of England cooled.

Rate cut expectations gained traction in the early part of this month following the tightening of lockdown measures in the UK. Investors sold the pound as it was feared the Bank of England may delve into negative rate territory to help kick-start the UK economy. However, negative rate expectations were dampened this week following Governor Bailey’s comments that they were “controversial” and caused “lots of issues”.

Having administered three million vaccines up until now, currency markets are largely being driven by expectations of how quickly economies could return back to normal. With Brexit headwinds cleared, the UK announcing the introduction of mass-vaccination centres and leading the EU in its vaccination race, investors are expecting the UK economy to bounce back quicker than the EU. To show how far in front the UK are compared to the EU, the UK administered the same number of vaccines yesterday as France have in total. This is making the country an attractive proposition for foreign investors and is driving GBP demand.

There was some cause for concern for the UK economy this morning after GDP contracted in November ended a run of six consecutive months of growth, indicating that we could be heading for a double dip recession. According to data from the Office for National Statistics, UK GDP contracted 2.6% in November as the second national lockdown was implemented. Despite this, the contraction of 2.6% was better than initial market expectations of 5.7%.

It must be noted that economists expect UK GDP to have grown in December, when lockdown restrictions were relaxed in the first part of the month. However, a new economic downturn is forecast for the new year as restrictions were introduced again to tackle the UK’s soaring COVID-19 infection rate.

The dollar’s resurgence from near three year lows halted yesterday after US Federal Reserve Chair Jerome Powell stated that US interest rates wouldn’t rise any time soon and rejected suggestions the Fed may start reducing its bond purchases in the near term.

Speaking yesterday, Powell stated that whilst the US economy remains far from where the Fed want it to be, he sees no reason for changing its highly accommodative stance until the “job is well and truly done”.

President-elect Joe Biden unveiled a $1.9 trillion coronavirus relief proposal to help combat the pandemic and the economic crisis it has caused. The plan includes $160 billion to improve vaccination and testing efforts, $350 billion for state and local governments as well as $1 trillion in relief to families, via direct payments and unemployment insurance. The impact on the dollar was subdued as a significant stimulus proposal had already been priced into the market ahead of the announcement.

• 07:00 – GBP- GDP (MoM – Nov) Exceeded expectations of -5.7% to read -2.6%
• 07:00 – GBP – Manufacturing Production (YoY – Nov) Exceeded expectations of -4.8% to read -3.8%
• 13:30 – USD – Retail Sales (MoM) (Dec) Expected to increase to 0% from -1.1% previous
• 15:00 – USD – Michigan Consumer Sentiment Index (Jan) Expected to decrease to 80 from 80.7

Analysts are preparing for long term weakness in the dollar over the course of 2021 as we await president-elect Joe Biden’s vast stimulus plan. The stimulus would support a broader risk sentiment, which in turn would sap the greenback as investors look outside of safe-havens.

The specifics of this stimulus should become clearer today as we are expecting Biden to detail a plan of “trillions” of dollars for pandemic relief, with the specific figure expected to be around $2 trillion. This figure which was reported by various news outlets is significantly higher than the $1.3 trillion figure that was proposed by Senator Chuck Schumer.

We saw initial dollar strength as treasury yields picked up in immediate response to this news, but longer term we can expect weakness as the bounce is a reaction of bearish positions being altered. This relief needs to be printed and we can expect US debt to further spiral under a Democrat-controlled Congress.

Yesterday also saw the historic second impeachment of Donald Trump, a first in the history of American politics. The big difference from the previous impeachment is the Republican presence alongside Democrats, ten Republicans joined them in the House of Representatives to charge Trump with inciting insurrection in last week’s rioting within the Capitol. The article of impeachment was passed 232-197, however it is unlikely that the impeachment will proceed before Trump leaves office. What could be significant in the future is that a Senate conviction could then lead on to a vote to ban Trump from running for office again.

• USD- 17:30: Fed’s Chair Powell Speech

Sterling rallied over the course of yesterday against both the USD and EUR. This continued this morning as GBP/EUR is trading over 1.12 and cable trading just below 1.37. Markets took comfort in comments from BoE Governor Bailey, who indicated it was too soon to cut interest rates again. Governor Bailey stated he is ‘willing to wait and assess the shape of the recovery’ before making any drastic decisions. His decision was also partly due to an acceleration in the UK vaccine roll out. NHS England announced that 2,080,820 people have already received their first dose. This is the highest, per 100 people, around Europe and the US. By mid February, the government aims to have vaccinated all over 80’s and those in the highest risk categories. This, in essence, should alleviate the majority of pressures the NHS is currently facing, thus allowing restrictions to be lifted.

While the plan sounds good, we will have to wait and see if the government can keep to their promise on this. Should they fulfil on this, and the pressure of the NHS is lifted, we could see the recovery for the UK economy happen much faster than anticipated. This may steer the BoE away from negative interest rates but in the meantime, sterling remains optimistic as more and more begin to get vaccinated.

Is time finally up for Donald Trump? It may look that way. Impeachment has become imminent again as a race from the Democrats has begun to remove him from office. Even prominent Republicans are calling for his head. Liz Cheney, the 3rd most senior Republican, agreed that the party ‘should vote to impeach Mr Trump’. The US house voted (223-205) to urge Vice President Pence to begin the 25th amendment process, but he has ruled this out.

It’s not just politicians that are looking to dump trump, a whole host of online services and even banks are cutting relationships with him over his involvement in last week’s incident. Most notably, Deutsche Bank announced it would no longer do business with Trump after propping up the Trump organisation for over two decades.

Finally, with only a week to go until Biden’s presidency, the stimulus package will be his first major action once in office. He has called for an increase to a $2,000 stimulus check amongst other things to provide Americans the support they have needed for months. Biden wants to seek a deal with the Republicans on COVID-19 relief, rather than attempting to push through legislation without their support. It seems this president will take a much more fair and reasonable approach compared to his predecessor.

• 09:00 GMT : ECB President Lagarde Speech
• 13:30 GMT : Consumer Price Index ex Food & Energy (MoM) (Dec)
• 13:30 GMT : Consumer Price Index ex Food & Energy (YoY)

The pound was among the riskier assets damaged by a strong recovering dollar yesterday as investors weighed up the risk of the Bank of England moving towards negative rates.

The pound has dropped against both the dollar and euro so far this month, the last-minute Brexit deal that was reached in late December has been quickly overshadowed by tighter lockdown measures to combat the spread of a new variant of COVID-19. The UK’s Chief Medical Officer Chris Witty has stated the next few weeks of the pandemic will be the worst so far in terms of people being admitted to hospital.

Currency markets are now beginning to price in negative interest rates for the UK as early as May 2021, compared with an August estimate just after the Brexit trade deal was struck last month.

The dollar moved higher across the board yesterday, extending its rebound from the near three-year low hit last week, taking strength from the recent spike in Treasury yields and the prospect of a growth boost from higher US fiscal stimulus.

Democratic US president-elect Joe Biden, who officially becomes president on 20th January, has his party now controlling both houses of Congress and has promised trillions in extra pandemic-relief spending. Usually the extra spending plans would move investors to worry about rising inflation and its detrimental effect on the US dollar in a weak economy, but the currency has been supported in recent weeks thanks to rising US yields.

The pound has pared losses against the Euro and could be supported in the coming weeks with the announcement of a third vaccine being approved and the acceleration of vaccinations, although international factors and the Bank of England’s monetary policy will also have a major sway on the pounds direction.

The GBP/EUR exchange rate was close to one percent lower for the week by Friday after partially recovering earlier losses. This was largely due to the start of a third lockdown and the increased spread of coronavirus infections.

The pound is already the worst performing major currency for 2021 and got to as low as 1.10 in the middle of week but recovered by Friday back to 1.11.

The rising risk is whether the BoE will decide to ease monetary policy further and early. Any boost from the newly agreed trade agreement with the EU have been offset with the possibility of negative interests from the BoE. The bank has been assessing the merits of a negative rate policy and has previously said it will set out findings when the decision from its next meeting is announced on January 28. Several of the BoE’s Monetary Policy Committee members will also deliver speeches this week, which could attract more attention than usual as the market calculates the risk of an experiment with negative interest rates.

In addition, November’s GDP data is due out on Friday, where economists are looking on average for a -4.4% fall as that month saw a toughening of coronavirus-related restrictions when businesses in the hospitality sector were asked to close again.

On Friday, the USD rose against a basket of major currencies after poor December US payrolls raised market expectations for further stimulus measures aimed to aid economic recovery that has been battered by the coronavirus.

Payrolls decreased by 140,000 in December, the first decline in eight months, well below expectations that forecast an increase of 60,000 jobs. The unemployment rate reached 6.7% whilst data throughout last week leading up to Friday’s report indicated a stalling labour market. US president-elect Joe Biden said the jobs report shows Americans needed more immediate relief and that taking action now would help the economy even with deficit financing. The Democrats’ Senate seat wins last week give Biden licence to push through more spending, which some analysts predict will fuel risk and be negative for the USD.

Both the euro and the pound weakened against the dollar as it gained ground on both currencies. The euro was down 0.5% to $1.2209 while sterling was trading at $1.3562, down 0.01% on the day.

• 15.00 – MPC Member Tenreyro Speaks