Today marks the first steps out of lockdown for England with schools reopening. Two people from different households can also meet outside and care home residents can have one regular visitor. The next step will come at the end of March with the rule of six (or two households) and outdoor sports restarting. The further easing steps will depend on the governments four tests being met.
Chancellor Sunak extended the support schemes within the budget, but outlined tax rises to come in the future. These included increases in Corporation Tax and effective increases in personal tax levels. The Office of Budget Responsibility revised up near-term GDP forecasts on the basis of the lockdown easing plan. However, GDP is expected to fall sharply in January before recovering from February and onwards. The OBR predicts pre-pandemic GDP levels by mid-2022. They expect this to be driven by a rebound in consumption.
Most expect a fall in GDP of between 4.5 and 5% for January due to the lockdown restrictions. There will also be some impact from new EU trading arrangements, though it will be hard to define the relative impact. This will likely be the low point for GDP. Bank of England Governor Bailey speaks today on the economic output.
GBPEUR – 1.1614
GBPUSD – 1.3812
The recent government bond market sell-off has elicited slightly different responses from global central banks. For the ECB, officials have been much more cautious about rising yields. Their view seems to be that the Eurozone economy remains fragile given the slow vaccine rollout. At this week’s policy meeting, the ECB is expected to hold interest rates and its asset purchase programmes.
There is the possibility that the ECB will use the flexibility of the existing €1.85 trillion Pandemic Emergency Purchase Programme (PEPP). They can increase the pace of weekly bond purchases. Up to now, they have been purchasing around €20bn per week. If they are concerned about the potential increases in bond yields, they could increase the pace of purchases to keep rates from rising.
Since the December forecasts, the near-term outlook for growth is worse. The new Covid strain and extended lockdowns have impacted growth and inflation has risen due to higher energy costs. The message from the ECB will be that policy will remain supportive and it will counter tightening of financial market conditions until the recovery improves. Industrial production and GDP are likely to continue to highlight weakness in the economy due to restrictions.
EURUSD – 1.1893
EURGBP – 0.8610
The fiscal stimulus package was passed over the weekend by the U.S. Senate. It will go back to the U.S. House for approval before President Biden signs it into law. he Senate bill differs from the House version, notably on the increase in the minimum wage. The two will need to go through a ‘reconciliation’ process which may delay the final passage. The Democrats are keen for the package to be passed before 14 March when some existing stimulus measures expire.
Meanwhile, the US economy added 379,000 jobs in February. The is far more than forecast and saw the unemployment rate fall slightly to 6.2%. The real rate is much higher but masked by the various measures in place. This week we will see inflation, weekly jobless claims and consumer sentiment releases. There will be no further Fed speeches this week ahead of the 16-17 March FOMC meeting.
GBPUSD – 1.3812
EURUSD – 1.1893
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*Interbank rates correct at 7 am on the date of publishing.