The US dollar and Euro have made some gains against the pound this week as concerns grow about the Delta covid variant and tension mounts over Brexit.

The Delta variant, thought to be 40% more transmissible than other strains, has seen cases rise rapidly in the UK, doubling nearly every ten days according to the latest data. This has led to speculation in The Times that ministers are becoming increasingly pessimistic about the country’s full reopening on June 21st, following a ‘downbeat’ briefing from senior medical advisors Chris Whitty and Sir Patrick Vallance. The Times reported that so-called ‘Freedom Day’ may be pushed back by two weeks to enable all over-50s to be fully vaccinated and leave sufficient time for jabs to take effect before restrictions are lifted.

Analysts have blamed this uncertainty for sterling’s soft start to the week, alongside continued Brexit contention around Northern Ireland and the implementation of the trade protocol, which remains unresolved. Tension has grown between London and Brussels as the UK extended the period without checks of the customs border between Great Britain and Northern Ireland. So far this has been largely ignored by the market but it’s a story that has the potential to develop.

In the US, a miss on expected employment numbers on Friday seems to have been offset by remarks made by Treasury Secretary Janet Yellen's on interest rates yesterday. She stated that higher US interest rates “would actually be a plus for society’s point of view and the Fed’s point of view”. Although markets have not reacted too heavily to these comments, should the Fed chair Powell echo these sentiments at his press conference next week then we could expect to see some more volatility in the dollar.

The FX markets have had a relatively quiet fortnight and sterling crosses continue to remain within tight trading ranges. As a result, the GBP/USD has lost half a cent from yesterday’s high but continues to trade comfortably above 1.40. The GBP/EUR remains buoyant but has also lost half a cent from yesterday and trades close to a 1-week low. The EUR/USD has clawed back around 1-cent from Friday’s low and continues to trade at elevated levels and over the 1.21 mark.

The next key event on the calendar is the ECB interest rate meeting on Thursday. We do not expect any policy action from the ECB, however, with the improvement in economic news from the region, we might expect less dovish comments from the Governing Council.