Sterling rose for a second week against the dollar on Friday, supported by a hawkish Bank of England and a successful vaccination program which has enabled the gradual reopening of businesses.

The Bank has begun tapering asset purchases, while the country is restructuring its vaccine rollout program to help protect more quickly those in areas where a specific variant of the coronavirus, first detected in India, has emerged. The UK has been among the top countries with the fastest vaccination in the world, giving a first shot to almost 70% of the adult population and a second one to 36%, helping to reduce infection rates and deaths.

Near-term gains

The British Pound will likely remain supported against the euro and dollar over the coming weeks according to foreign exchange analysts. The fast vaccine rollout has allowed a sharp economic rebound which has been unprecedented. The positive sentiment around the vaccine rollout is expected to offer further near-term support, analysts have noted. NatWest analysts have said that "While the pace of rollout has been a factor, it’s the UK economy’s underlying sensitivity to the vaccine that has been the most important aspect," they add. "The UK has suffered the greatest hit to GDP of the developed economies during the pandemic and therefore has the most to benefit from the easing of restrictions." The positive vaccine story has already been priced in the current level of the pound and as such analysts do not expect many more gains. The vaccine programme and the latest Scottish elections which have eased anxieties about a second Scottish independence referendum, offered support to the pound, but further gains might be limited.

Upside potential for the pound?

With expectations of a third major unlocking on Monday 17th of May and a final unlocking on 21st of June, analysts see further upside potential for the pound. The recent gains are partly due to the Bank of England's policy meeting on the 6th of May where it was announced that the Bank will be reducing the scale of weekly quantitative easing purchases and raise economic forecasts. As the global economic recovery gathers momentum, strategists at UBS Wealth Management also expect the pound to advance further.

The Bank of England expects the UK economy to return to pre-pandemic levels before the end of 2021. However, NatWest analysts have warned that there are significant risks as we move ahead: “Brexit is weighing on trend growth. Softer productivity trends, deep economic scarring and a deteriorating sustainable current account deficit position are expected to impact negatively.”

Danske Bank has also said that they retain a bullish stance, but they believe there "is no obvious trigger for another sharp move" higher in GBP/EUR near-term. Strategists at Rabobank have also said this week that further advances will be rare, with a new 2021 high possible by year-end. Senior FX Strategist at Rabobank, Jane Foley said: "we continue to expect only a slow drift lower for EUR/GBP.

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The British Pound dropped, losing all the recent gains after global stock markets fell.  Analysts, however, hope that the vaccine rollout will help offer some support, thus limiting the pound’s losses. 

As mentioned in our previous article on the pound, the British currency is influenced by wider market trends and sentiment, which has recently become more obvious, once the Brexit negotiations were completed. This is going to become the default scenario in 2021, which will see the pound rising against major currencies when markets are going up, and, on the other hand, see it falling when global markets are underperforming.

On Wednesday, the pound reversed its gains after global markets fell and investor “risk off” sentiment drove equity and commodity markets to fall, and the dollar to strengthen. There was no obvious reason behind the decline and analysts believe that a fall in stock markets is expected, as more traders close their trades. In a report from Reuters, it was noted that traders were making leveraged trades taking profits to cover losses from other trades, leading to significant falls in overcrowded trades. Additionally, increased trading volume in certain sectors of the market created volatility.

Slow vaccine rollout disappoints

Markets appear to have been too optimistic about a quick economic recovery based on the prospect of vaccinating billions of people. According to CNBC, “a sluggish rollout of the Covid vaccines  threatens Wall Street’s rosy outlook.” In the UK, the pharmaceutical giant AstraZeneca continued on Thursday its dispute with the European Commission, after telling the bloc last week there would be a 60% shortfall in supplies due to production problems. The dispute could trigger a UK-EU trade war amid frustration at the speed of the vaccine rollout in Europe.

In an interview with Euronews, German MEP Peter Liese said that it was unfair the way European citizens were treated by the UK pharmaceutical company:

"For five weeks now the BioNTech vaccine that is only produced in Europe, that has been developed with the aid of the German state and European Union money, is shipped to the United Kingdom. So people in the United Kingdom are vaccinated with a very good vaccine that is produced in Europe, supported by European money. If there is anyone thinking that European citizens would accept that we give this high-quality vaccine to the UK and would accept to be treated as second class by UK based company. I think the only consequence can be to immediately stop the export of the BioNTech vaccine and then we are in the middle of a trade war. So, the company and the UK better think twice.

In relation to the demand for more vaccines, Barbara Rockefeller of Rockefeller Treasury Services Inc. noted that “We were all so enamoured of the blazingly fast development of vaccines that we neglected to consider production bottlenecks—and were misled by company and government announcements alike that the stuff could be produced on demand. It seems we really do have a global shortage of vaccines that will persist for many months.”

If the vaccine rollout continues smoothly and more vaccines become widely available, then the pound will rally. However, the lack of vaccines and a possible trade war between the UK and the EU could threaten the British currency.

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