• Joel

GBP Gains With UK Lockdown to Be Eased Plus VAT Cut

GBP has been amongst the G10 outperformers this morning, with GBPUSD rallying as high as the 1.2430s, before then slipping back to sub 1.2400 levels (still a decent amount above 1.2340 overnight lows).

A gradual softening in USD this morning has been one major factor underpinning GBP (and other risk sensitive FX such as AUD and NZD). USD has been hit by an improvement in risk appetite this morning; global equities have rallied off of Sunday open lows to trade in the green, as investors shrug of second Covid-19 wave concerns in the US amid better recent news on the US/China trade front.

However, also supporting GBP this morning has been good news on the UK domestic front.

1) UK Lockdown to be eased substantially in July

UK PM Johnson is expected to unveil the latest lockdown easing plan, including a review of the 2-metre social distancing rule on Tuesday. Reports suggest that PM Johnson is set to announce a one metre plus rule for all venues including restaurants, pubs and schools, which will be effective from July 4th.

Furthermore, the UK Health Secretary suggested customers may need to register when visiting pubs and restaurants.

Separately, reports suggest that the UK government may announce foreign travel can resume from July 4th.

The UK has had one of the longest lockdowns in Europe (in terms of the time between lockdown being first imposed and pubs being first opened – in the UK, they have not been reopened), so this is welcome news for the UK economy and GBP.

2) UK VAT cut

UK Finance Minister Sunak is reportedly set to cut the value-added tax (VAT) as part of the government’s latest efforts to tackle economic fallout from the coronavirus outbreak, the Sunday Times newspaper reported.

Sunak has ordered officials to prepare options for reducing the sales tax, including a cut in the headline rate, and zero rating more products for a fixed period, the newspaper reported.

Moreover, Sunak may announce lowering the VAT and business rates in a speech in early July, the report added, citing officials.

(A VAT tax cut is a form of fiscal stimulus, as it means that the tax burden on the economy is being reduced, with the government making up the tax shortfall by borrowing money – fiscal stimulus is typically positive for a currency, hence the boost to GBP).

GBP’s gains likely to be short-lived

Caution – over the longer-term many analysts remain very cautious over GBP, largely as a consequence of the dire outlook for the UK economy compared to its peers.

The longer duration of the UK lockdown, given the persistently high spread rate of the virus, means that the UK is unlikely to participate in as aggressive of an economic recovery in May and June as other countries did (like in mainland Europe and the US).

Moreover, with its high dependence on services (which have been worse hit than the manufacturing sector), the UK economy was always seen as structurally more exposed to the negative impact of lockdown.

All the while, given the UK’s dependence on imports, rather than exports, the faster recovery abroad is unlikely to have as much of a positive impact on the UK economy. (In short, the UK has a weak balance of payments position).

Compounding all of the above negatives is continued uncertainty over the UK’s future trading relationship with its largest trade partner, the EU.

It is worth caveating that many analysts are also still bearish USD (given the erosion of the US interest rate advantage and persistently dovish Fed), meaning we could well see GBP strengthen against USD. But if the USD weakening cycle does continue, GBP will likely be a laggard compared to other currencies. 



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