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2021: the year of the pound?

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What a difference six months can make.
In October last year, the UK was in the throes of a tiered lockdown system, the COVID-19 death count was the worst in Europe, and the pound was struggling.

The outlook was murky, to say the least. Britain’s GDP had shed a massive 21% and there were no real plans to get back on track. The furlough scheme was in full swing, but everybody knew how much it was costing — and that it couldn’t last forever. In November, unemployment jumped even further.

To make things worse, complications in the Brexit agreement meant that a ‘no deal’ scenario loomed over the New Year’s Eve deadline.

This was all felt in the value of the pound. GBP/EUR was hovering just above 1.10. With no vaccine in site, there was no obvious way out of this situation.

Six months later, and that all seems like a long time ago now. GBP/EUR is now sitting healthy at 1.17. A number of experts and investors have forecasted further good times ahead for the currency. More and more, it looks like it’s going to be one of the winning currencies of the next year.

Nomura, a global financial services company, has released new research this week showing that they expect the current growth of the pound to continue over the next few months.

How did it get to this?
What was the perfect storm that has enabled the UK to turn things around so drastically in such a short period of time?

First, the UK left the EU with a deal. Now the ‘no deal’ scenario that had been weighing so heavily on GBP and the UK economy more widely is firmly off the table.

That’s not to say it’s perfectly smooth sailing now though. The services sector agreement has not yet been reached and there’s been fewer headlines about the agreement than at the beginning of the year. Making circa 80% of the UK’s GDP, the importance of the services sector is paramount. External investors will be monitoring the news closely to find out if any developments have been made.

Also, trade with the EU has been a sticky news story. The seemingly endless queues of lorries, threats to custom officials in Northern Ireland, and food rotting at the borders are just some of the bad news stories.

But despite these difficulties, the pound has still been on a healthy ascent.

Opening up
The big story of our time — the vaccine. The UK has vaccinated over 23 million citizens — over a third of its population.

Meanwhile, the Eurozone is struggling. For instance, six months ago Germany was a shining example of how to handle to a pandemic. Yet now, only 10% of its population has had its first dose.

In fact, for some European nations, the coronavirus stats are going in the wrong direction. Slovakia, for example, has the highest death rate in Europe and is now having to export patients to Germany because their critical care has been overwhelmed.

The UK’s success with its vaccination scheme has meant that the country’s closer to reopening and getting its economy back on track. Boris Johnson has described his step-by-step plan to exit the lockdown as ‘cautious but irreversible.’

Schools are already open. And by June, if everything goes to plan, all other businesses will be too.

This should see a bounce back in the UK economy. As people are able to get out spending again, sectors that have struggled so massively, such as hospitality and travel, have a chance to get back on their feet. This will look good to foreign investors. Who, by investing in British businesses, will strengthen the value of GBP.

Ready to spend
In a way, the UK lockdown has been a tale of two halves. Many people have struggled. But at the same time, those who have been fortunate enough to stay financially secure have been able to save money. All in all, Brits have put away circa £250 billion over the last year.

Money is not the only thing that UK citizens have built up. Demand is also huge. People want to go to restaurants, go on holiday, buy luxury goods and much more.
And now, they have the money put away to afford it.

The issue here is that when this combination of savings and demand is unleashed in June, it could lead to a spending frenzy. The Bank of England has expressed concerns of inflation.

There’s debate about how severe inflation will be, and what steps the Bank of England will take to control it. Raising interest rates could be on the table as it’s a common strategy central banks use to calm inflation.

A side effect of raising interest rates is that it inspires foreign cashflow into the country. International investors seek out improved returns that higher interest rates present to them. This in turn, would mean a stronger pound.

Privalgo is a specialist foreign exchange company. With leading rates and an unrivalled personal service, we help thousands of individuals save money, time and headaches on their currency exchange. Book an appointment with a Privalgo Relationship Manager to see how we can help you.