UK Struggles With New Coronavirus Strain, Pound Surges

Created on January 12, 2021

New COVID-19 strain wreaks havoc on British economy; GBP recovers; UK economic data remain unchanged.

Bank of England Governor Andrew Bailey said recently that the latest surge in the number of COVID-19 infections has put the British economy in shambles, delaying the country’s recovery.

“ in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory,” he said during an online speech, adding that he expects unemployment to be over the current 4.9%, at 6.5%.

Regarding the possibility of setting interest rates below zero, he said that such a move could hurt the banking system, as it would complicate banks’ efforts to earn a rate of return and would hurt lending to other companies.

Bailey expects that economic activity will be depressed until vaccines are widespread enough to justify lifting some of the restrictions.

The coronavirus crisis continues to escalate in England due to the spread of a new strain of COVID-19. So far, 3,118,518 coronavirus cases and 81,960 total deaths have been reported since the beginning of the pandemic, making the UK the fifth most affected country in the world. The new strain is said to be more contagious, though it seems that the vaccines are still effective against it. In order to hinder its spread, the UK government decided to impose a national lockdown until the end of March.

According to England’s Chief Medical Officer Chris Whitty, the country is entering the most challenging phase of the pandemic, as hospitals are being overwhelmed and bodies are piling up.

“We’re now at the worst point of this epidemic for the UK. In the future, we will have the vaccine, but the numbers at the moment are higher than they were in the previous peak — by some distance,” Whitty said.

The UK is expected to hit its target of vaccinating 13 million people by mid-February.

Economic Calendar

Markets learned this week that like-for-like retail sales rose less than expected at 4.8% in December (year-on-year), against November’s 7.9%. Analysts had expected it to be at 7.9%. This is the worst annual change in 25 years.

“Physical non-food stores, including all of non-essential retail, saw sales drop by a quarter compared with 2019,” said the British Retail Consortium’s chief executive. “Christmas offered little respite for these retailers, as many shops were forced to shut during the peak trading period.”

Pound Recovers

So far this week, the pound sterling gained 0.24% against the US dollar, recovering from the previous week’s losses and gaining back lost ground at the beginning of the week.

The pound’s losses at the beginning of the week were attributed to expectations for negative cash rates, right after Monetary Policy Committee Member Silvana Tenreyro said that further cuts would continue to provide economic stimulus.

“GBP will have to brace itself for another wave of negative rate headlines,” said an analyst at ING. “GBP will be vulnerable to negative rate talk during lock-downs and EUR/GBP risks 0.91.”

The bank is currently divided regarding the feasibility of imposing negative cash rates, though Tenreyro said that at this point, the conclusion of such discussion seems obvious.

“Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time,” she said.

The general weakness of the pound since the beginning of the year is linked to the current coronavirus situation. As we already mentioned, the country is now facing its worst moment since the beginning of the pandemic and has yet to begin a massive vaccine rollout.

UK Economic Data Unchanged

Since our last report, the main economic indicators have remained unchanged.

November’s inflation data were way below the Bank of England’s inflation target, which is currently at 2 percent. The Consumer Price Index was below expectations, falling by 0.3% in yearly terms, after rising by 0.7 percent in the previous period. In monthly terms, it went down by 0.1 percent, also against projections, and underperforming the previous month’s figure.

The gross domestic product expanded by 16.0% in the third quarter, over expectations of 15.5%. Unemployment data shows an improving labor market at 4.9%, also against expectations of 5.1%, after being at 4.8% in the previous period.

Upcoming Events

• On Friday, the Office for National Statistics will publish the industrial and manufacturing production data.

• Also on Friday, the gross domestic product data will be released.

• The trade balance data will also be published on Friday.