The UK’s successful vaccination rollout programme, along with the BoE’s decision not to lower interest rates, have boosted market sentiment about the UK’s speedy economic recovery and pushed the pound higher. The pound is trading almost close to a nine-month high against the euro, and at a 33-month high against the dollar. It is almost getting closer to its highest levels in over three years.

Rabobank’s Jane Foley said: “GBP bulls have been flexing their muscles since the start of the year based on relief about the EU/UK trade deal and on hopes that the relatively rapid vaccine roll-out programme will lead to a fairly fast economic recovery this year.”

Weaker dollar

The pound’s strength is a result of it capitalising on the US dollar’s losses. The prospect of a major new US stimulus package has weakened the dollar, which continued to fall lower after last week’s disappointing US payrolls report. The wider increased confidence has turned investors away from the safe haven dollar and towards riskier assets.

JP Morgan explained that "The broader USD continues to trade with a much softer tone, drivers seem to be the relentless CNH bid into Chinese New Year and the fact that US yields backed aggressively off key levels and have now calmed down." According to JPMorgan, the USD selling by Chinese traders has also push the dollar lower, a move that is highlighting the importance of the Chinese Yuan in broader market movements.

The past three days’ weakness of the dollar shows that the recent dollar rally has come to an end and that the trend of depreciation has come back into play. JP Morgan said: "We added to our modest sterling longs yesterday via GBP/USD and look for this move to keep going at least until the end of the week (Chinese New Year on Friday).”

Quick vaccinations and market optimism

The UK economy might experience its troubles, but the swift pace of vaccinations suggests that economic recovery will be stronger and faster. The vaccination programme will soon impact health outcomes and boost the Bank of England’s positive outlook. If the Bank shows further optimism and investors are upbeat about economic prospects, then the pound will rise higher.

The general positive market sentiment has helped the pound, as it has become linked to risk appetite during the crisis.

With downside risks for Sterling expected and priced in, analysts see further potential for the pound as the vaccination rollout continues strong. As NatWest Markets analysts said, a "quicker pace of vaccine roll-out will likely lend support to Sterling.” However, they expect any pound increases to be short-lived, as the UK economy struggles post-Brexit.

The Bank of England has said that a strong economic rebound is possible once the lockdown restrictions are lifted and consumers start spending again.

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Sterling rose on Tuesday (02/02/2021) for the first time since last spring, after the GDP report showed that the eurozone GDP shrank by 0.7% in the last quarter of 2020 and will probably keep shrinking in the current quarter. While this is not as bad as it was expected, fears of a eurozone double-dip recession have risen. Following the news, the euro fell to a nine-month low against the pound. The euro has also dropped to a seven-week low against the US dollar.

For many economists, the EU’s inability to secure a quick vaccine rollout, the prolonged lockdowns and the prospect of further ones will continue to impact on the euro. Additionally, concerns about a double-dip recession are also weighing on the euro. Due to the slow vaccine rollout and the EU’s poor vaccine strategy, commission president Ursula von der Leyen has drawn criticism and had to respond by claiming that the UK’s vaccination programme had compromised on “safety and efficacy” safeguards to get a head start. She said that “Some countries started to vaccinate a little before Europe, it is true. But they resorted to emergency, 24-hour marketing authorisation procedures.” Von der Leyen has also been criticised by Jean-Claude Juncker, but she said that she should be judged in 2024 when her term ends.

Europe’s slow vaccine rollout could affect economic recovery

The slow start to Europe’s Covid-19 vaccination programme could affect its recovery, according to economists. Sam Miley, economist at the Centre for Economics and Business Research said: “The downtick in economic output in Q4 reflects the widespread reimplementation of Covid-19 contain measures across the continent, though does mask varying degrees of restriction severity across member states. This downward pressure on economic output looks set to continue in early 2021 due to the clampdown on new, more virulent strains of coronavirus, while subdued economic activity could continue for an even more protracted period in light of the eurozone’s relatively slower rollout of vaccinations.”

Other economists are also warning that the eurozone is possibly in a double-dip recession now. Christoph Weil, economist at Commerzbank, explained that eurozone GDP will continue to shrink in the January-March quarter, after the 0.7% decline recorded in October-December. “In the first quarter of 2021, the decline is likely to be somewhat steeper. However, there will not be a slump like the one in the first half of 2020. Instead, a noticeable recovery is likely to set in again from the spring.”

Global Chief Strategist at HSBC Global Asset Management, Joseph Little, said:  “The negative Q4 GDP print is confirmation of what investors already knew – a double dip recession in Europe at the end of 2020, with that weakness continuing through Q1. The live question for investors is what the delays in vaccine distribution and virus trends means for the growth outlook as we go through the year. We think the picture should improve through the summer, and that facilitates a ‘catch-up’ phase of growth for Europe in H2.”

UK vaccine rollout

Sterling rose due to optimism about the UK’s vaccination rollout and a wider positive risk sentiment.

The government is expected to vaccinate 15 million with the first dose of the vaccine by the middle of February so all who are clinically vulnerable have some level of resistance against the Covid-19 virus. If the vaccine programme goes as scheduled this, together with the strict lockdown measures will eventually allow the UK government to relax some of the restrictions. This will also help boost the currency. JP Morgan said: "We generally remain supportive of the stronger Sterling view given the impressive vaccine roll out the UK has implemented. Of course, short-term virus worries remain a headwind, particularly as UK lockdowns look set to stay for a significant amount of time.”

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If you are transferring funds overseas, contacting a currency specialist could save you time and money. Whether you are sending money to family or paying your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your personal or business’ transfer needs.