Vaccine Hopes Boost British Pound

 

 

The British pound continued a frantic two-month rise against the euro and the dollar, reaching new highs this week in a sign of traders’ enthusiasm for the country’s vaccination roll-out.

Just before Christmas, investors feared the country would leave the European single market without a post-Brexit trade agreement.

At the same time, a deadly second wave and new, more transmissible coronavirus variants pushed infection rates up and saw the death toll soar.

It currently stands at more than 120,000 — one of the worst in the world.

But since December, the pound has gained more than five percent against the euro and US dollar, making it a top performer among major currencies.

The jump is due to the number of people vaccinated: according to the government, one adult in three has already received a first dose, representing more than 17.5 million people.

Another reason for optimism is Prime Minister Boris Johnson’s publication Monday of a “cautious but irreversible” roadmap to ease lockdown restrictions by July.

“After a year in which the government’s reputation was soured by a string of policy U-turns, the UK has made good decisions regarding vaccines,” Jane Foley, head of FX strategy at Rabobank, told AFP.

“The vaccine rollout has improved the economic outlook in the UK relative to elsewhere, especially in the EU,” Capital Economics added in a note.

– Positive rate –
“Markets are still adjusting to the fact that the Bank of England is unlikely to implement negative rates for now,” added analysts at Swiss bank UBS.

Like other central banks, the Bank of England adopted a record low interest rate of just 0.1 percent to cushion the economic impact of the pandemic.

But traders were mainly worried it would adopt a negative rate like the European Central Bank or the Bank of Japan.

At its last monetary policy meeting, the bank took that option off the table until August, and governor Andrew Bailey said it might not be implemented then either.

As a result, forex traders began to bid up the pound against the dollar and the euro.

Unlike Europe’s single currency, whose strength has weighed on exports, the pound is still at relatively low levels.

While it is just above $1.40 at a near three-year high, the British currency is still six percent below levels seen before the June 2016 Brexit referendum, and 12 percent down against the euro.

“A stronger pound is another headwind for UK exporters and provides some small relief for households,” noted Paul Dales of Capital Economics.

“But it’s not going to make a big difference to the economy.”

Foley warned that “there are speed bumps ahead”.

The effectiveness of vaccines against coronavirus variants and the strength of the UK recovery will determine if the pound remains at its current levels or not, she forecast.

And another risk looms on May 6 when elections for the devolved parliament in Scotland could give fresh impetus to the pro-independence movement, she added.