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.”
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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