The UK currently appears to be struggling with another outbreak, with the UK government considering whether and possibly when to reintroduce restrictions. Meanwhile, the Bank of England had already decided to hike interest rates, which could help to stem GBP depreciation.
The British pound rose to around $1.33 today, moving away from the more than one-year low touched earlier in the week after data showed that the UK economy recovered from the pandemic faster than previously thought and the government decided not to tighten restrictions before Christmas (it may do so later, however). The UK economy is now only 1.5 percent below its pre-pandemic level in the final quarter of 2019, compared with the previous estimate of 2.1 percent below, due to upward revisions to growth in 2020. Despite this, ONS data showed that GDP grew by 1.1 percent in Q3, weaker than the initial growth estimate of 1.3 percent. Last week, the pound jumped as high as $1.337 after the Bank of England unexpectedly raised rates for the first time since the start of the pandemic due to a surge in inflation. However, some of that move may now have been corrected.
In contrast, the Japanese yen weakened to 114 per dollar on Wednesday as Bank of Japan Governor Haruhiko Kuroda recently said it was too early to consider normalizing monetary policy, reinforcing the view that Japan's central bank will lag other central banks in reducing monetary stimulus. The minutes of the BOJ's October meeting released today also showed that some board members believe that a weak yen will have a positive impact on the Japanese economy as a whole through potentially higher earnings and stock prices. Meanwhile, the BOJ maintained its target for short-term interest rates at -0.1 percent and for 10-year bond yields near 0 percent at its December meeting, as widely expected. However, the central bank decided to scale back its corporate debt purchases to pre-pandemic levels and to scale back part of its emergency funding program beyond the March 2022 deadline.
Meanwhile, the Australian dollar was consolidating around the $0.713 level on Wednesday, after rising during the previous session, and the rally in riskier assets seemed to be losing momentum. The lingering threat of a new variant of the coronavirus and a dovish confirmation in the minutes of the Reserve Bank of Australia's latest meeting may have also affected sentiment. Prime Minister Scott Morrison said on Tuesday that Australia must learn to live with the virus as the country seeks to ease restrictions in the face of high vaccination rates, despite a surge in daily Covid cases. Meanwhile, the AUD exchange rate seemed to fall last week after RBA Governor Philip Lowe reiterated that the central bank will keep interest rates at a record low in 2022. The AUD also appeared weak against major currencies including the US dollar, euro, sterling and yen amid hawkish decisions by their central banks.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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