Published: 6 July 2021
By far, the biggest story in the second quarter of 2021 was about Covid vaccines, and who was getting them. The logic had it that the more completely a country vaccinates its people, the more quickly its economy will be able to return to normal. As ever in financial markets, forecasts and expectations had at least as much impact as actual achievements. Thus it was that the early promise of Britain on the vaccine front gave the pound a significant boost in the first quarter. Investors were far less excited to see that two-thirds of the population had received at least one jab by the end of June.
The other long-running narrative related to central banks’ purchases of financial assets and the future course of interest rates. For the most part, attention centred on the US Federal Reserve, and investors were acutely aware of every comment, nod and shrug by senior Fed officials. Their reactions affected not only the US dollar itself but also the currencies perceived to have benefited from global monetary relaxation.
Perhaps unsurprisingly, the three months did not deliver a coherent result. The safe-haven Swiss franc was the top performer, while the equally trustworthy Japanese yen was one of the biggest losers. The Australian and NZ dollars headed in opposite directions too, as did the Northern Scandinavian crowns.
Three months ago, there was optimism that Covid restrictions would soon be lifted in Britain. Today that relaxation is only a fortnight away, but not even the prime minister is unreservedly optimistic that the Freedom Day card can be played without risk. Even so, the move should be, at least for a month or two, positive for the UK economy and the pound.
There is also uncertainty over the ending of government furlough subsidies. How many people will scurry happily back to their commute, and how many will decide that there must be a more agreeable way of earning a crust. Some sections of the economy will turn out to be redundant when fewer people spend fewer days in city business districts.
As for currencies, to what extent will sterling be able to extend the upward progress that it enjoyed in the first half of the year, when it strengthened by an average of 3.8%? Where will the support come from if Freedom Day proves to be illusory? That is not pessimism, it is realism.
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