The improved global market sentiment and the slowing of Covid-19 case rates has helped the pound to recover, but Brexit anxieties could pose a potential threat to the currency.

Covid-19 and the NHS app

This week alone 96 deaths have been reported, the highest number since March. While on 1 June there were 0 coronavirus deaths, 1,114 deaths have been reported since then with 73 deaths being reported on Wednesday (21 July). The vaccination programme has not managed to break the link between infections and fatalities, with the total number of deaths from the pandemic reaching 128,896. However, new cases have not risen considerably, as the number of new cases that were reported on Wednesday was 44,104, slightly higher than the previous week’s 42,302. As it stands, 46,388,744 people have been vaccinated at least with the first shot in the UK. According to statistics, around 39,035 people had their first jab on Tuesday, while 161,279 people had their second shot yesterday, with 36,404,566 people now being fully inoculated.

With the ongoing self-isolation of workers due to coming into close contact with a positive coronavirus case, businesses have been affected, while the government has expressed its apologies for the inconvenience. Director of food and sustainability at the British Retail Consortium Andrew Opie told The Times that the "pingdemic” has put pressure on retailers who found it difficult to keep stores open and shelves stocked, demanded that the government needed to act fast.

Boris Johnson, speaking at the last PMQs before the summer recess, said "everybody understands the inconvenience of being pinged". The prime minister himself had to isolate after coming into contact with Covid-positive Health Secretary Sajid Javid last week.

Labour leader Sir Keir Starmer accused the prime minister of the mixed messages regarding the NHS Covid-19 app and said: "When it comes to creating confusion, the prime minister is a super-spreader.” Starmer had to isolate himself following one of his children being tested positive.

According to the figures from the ONS, around 9 in 10 adults in all parts of the UK could possibly have Covid-19 antibodies with the estimates ranging from 88.6% in Scotland to 92.6% in Wales, 90.0% for Northern Ireland and 91.9% for England.

Brexit and Covid-19: How will the pound fair?

It simply depends on improved market sentiment and the management of the Covid-19 Delta variant. The near-term outlook for Sterling will be determined by concerns regarding the Delta variant and whether investors have fully priced in the news.  If they have done so, then possibly the currency and market sentiment will improve. 

Brexit remains a threat to the currency too, as the UK and EU could find themselves at the opposite end of the table over the Northern Ireland question. On Wednesday, the UK announced its intention to renegotiate certain points included in the Northern Ireland protocol, and argued that in its current form it will create problems for trading goods between Great Britain and Northern Ireland. The release of the command paper outlining the UK government proposals about how the Protocol should be changed poses a major challenge to the EU.  This move could potentially hurt the pound, according to analysts. However, they believe that this could become a more serious concern as we move closer to 1 October with potential legal battles and EU threatening the UK with the imposition of trade sanctions.

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Brexit is back in the picture, as there are talks of a potential trade war between the UK and EU over the coming days after both sides failed to reach agreement on the Northern Ireland protocol. The EU has threatened to impose sanctions on UK exports to Northern Ireland if it fails to implement the terms of the Northern Ireland protocol next month. If things escalate, the pound will also be affected, as it usually falls when concerns around Brexit rise.

EU press conference

On Wednesday, UK and EU officials met in an attempt to resolve any disputes over trade rules for Northern Ireland. In the EU press conference following talks with Lord Frost on Northern Ireland protocol, Maroš Šefčovič, the vice-president of the European Commission who serves as the EU’s lead on post-Brexit negotiations with the UK, said that fundamental gaps remained in the UK’s implementation of the deal. On the Northern Ireland protocol, both sides agreed in 2019 this was the best solution to protect the Good Friday agreement. In December last year some solutions were agreed, including grace periods and exemptions in areas where the UK was not ready to implement the protocol. But he highlighted that “we cannot undo the core of the protocol”, as there are still “numerous and fundamental gaps” in the UK’s implementation of the deal.

He also confirmed that the EU could take retaliatory action. Šefčovič says the EU is a peace project, and, as he said, he did not arrive with a list as he is looking for a solution. But he did confirm that the EU could impose tariffs on some UK goods if the Northern Ireland protocol was not implemented. The protocol is designed to prevent checks at the border with Ireland. So, the EU agreed to let the UK conduct these checks at the GB/NI border. The easiest thing would be for the UK to accept EU SPS standards. Nonetheless, Šefčovič says he has a good and honest relationship with Frost and believes in Frost’s “best intentions”.

How will the pound react?

If the relationship with Brussels breaks this could weigh on Sterling sentiment in the short-term. If the EU does take any retaliatory action, and tensions escalate, then the possibility of the UK losing access to the single market would raise significant risks for the UK economy and hurt the pound.

The Prime Minister’s spokesman said: "The protocol was formed in a spirit of compromise, in challenging circumstances. It was not a finished solution... and we didn't expect the EU to take such a purist approach to it. We are working very hard to resolve these issues consensually. But the Prime Minister has always made clear we will consider all our options in meeting our responsibility to sustain peace and prosperity in Northern Ireland.”

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Sterling will continue to rise in the coming months, analysts are expecting, but they also warn a period of pause for the currency in the near term. Investors will be closely watching the release of crucial economic data this week as well as the next ones to find more evidence about the economy returning back to normality. With employment data out on Tuesday, inflation and PMI numbers out on Wednesday, and retail sales out on Friday, the current week will be a busy one.

Vaccination programme

With the vaccination rollout going smoothly and the UK being ahead of the rest of Europe, investors are waiting to see that the economy is improving. Any advances in Sterling during the coming months will be indicative of the country’s economic recovery and that the UK is exiting the pandemic in a sustainable manner due to the fast pace of the vaccine programme. Unlike the UK, Covid cases in Germany and France are rising and resulting in extended lockdown measures.

EU-UK trade deal

Also helping the pound is the renewed certainty in the government and Brexit after December’s trade deal. As economists noted, "We expect the Brexit deal will eventually reduce the uncertainty which has been weighing on especially UK businesses over many years now after the near-term adjustment to the new relationship is over. We believe Brexit has moved into the background now.” With less risks and more stability, the pound will continue to rise, however, analysts are cautioning that the currency might find it difficult to maintain its appreciation pace in the coming days and weeks. Especially, after the BoE kept a cautious tone and did not raise interest rates, despite recent positive data, markets might have already priced in the positive news and the pound might get stuck for a while. For many analysts, there is still hope, as the pound could move higher when it becomes clearer that it has exited the pandemic unscathed and strong.

In other words, the near-term pound behaviour will mostly depend on the economic data and whether there are strong numbers to boost market confidence. The coming weeks will be crucial in that regard.

UK economic data

Tomorrow, the release of UK employment data for December and inflation numbers on Wednesday will be closely watched by investors. After losing -114k jobs in November, the latest reading is expected to be disappointing indicating a loss of -170k jobs. These job losses are coming despite the extension of the furlough scheme into September.

The inflation numbers for February are expected to rise to 0.8% from 0.7% but the market will expect a higher move. A higher UK inflation number would then put pressure on the Bank of England to bring forward its rate hike plans when the economy reopens in June.

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The British Pound has risen following comments by the Bank of England's Governor Andrew Bailey that the rate will not be cut to 0% or below in the coming weeks. With the ongoing vaccine rollout and positive market sentiment about a quick economic recovery, the Bank appears to be willing to wait and see how the UK economy fairs before taking interest rates into negative territory.

Vaccine rollout

The government has promised to vaccinate 15 million people in the top four priority groups over the next five weeks and 17 million more in the five remaining groups by spring. According to the government’s immunisation plan, fifty special vaccination centres will support hospitals and doctors to provide 2 million jabs a week by the end of January.

The inoculation plan was unveiled on Monday as the NHS announced that 866,000 people in England were vaccinated the first week of January. On Monday, seven national vaccination centres opened in England, as well as 200 hospital sites and many GP centres. 50 more special centres will open by the end of the month. Many GPs believe that the 2m-a-week target can be achieved, despite MPs’ complaints in the parliament that the supply was chaotic.

More Vaccinations, Stronger Pound

The more people are vaccinated, the sooner the pandemic will be controlled, and the economy will recover. If everyone is strong and healthy, then the body of the economy and the country will also be strong and healthy. This will ensure a robust economy and will affect whether the Bank of England changes interest rates and its quantitative easing programme. If the BoE chose to lower interest rates, this would have been with the aim of stimulating lending and injecting a flow of money into the economy during the lockdown. However, such drastic measures would have pushed the pound lower. 

The governor of the BoE highlighted that there were too many concerns about negative interest rates, and that members of the Bank's Monetary Policy Committee debated their possible benefits. He has also warned that negative interest rates may hurt economic recovery and he appeared to be against such a move followed by such countries as Sweden, Denmark and Japan. He said: there are “a lot of issues” when considering using negative interest rates as a fiscal tool: “At first glance they are counter-intuitive.” He added: “First of all, no country has really used negative interest rates at the retail end of the market.”

There is, however, growing speculation after the recent comments by Silvana Tenreyro, a member of the Bank’s rate-setting Monetary Policy Committee, that using negative rates is a possibility and can be done without depriving the banking system. Interest rates have been at a historic low of 0.1% since last March in an attempt to protect the economy from the pandemic. If the possibility of negative interest rates is slowly reduced in the coming weeks, the pound is expected to get a further boost.

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The possibility of the Bank of England pushing interest rates into negative territory has been hinted at by a member of the BoE’s Monetary Policy Committee. If interest rates go lower, it is expected that the pound will be negatively impacted in the next few months. The decision to use negative interest rates is considered by the bank as positive in regard to offering further support to a struggling economy.

MPC member Silvana Tenreyro said in an online speech that negative interest rates will boost UK growth and inflation. "Cutting Bank Rate to its record low of 0.1% has helped loosen lending conditions relative to the counterfactual (of no policy change), and I believe further cuts would continue to provide stimulus," Tenreyro noted. Tenreyro said the Bank of England has been in contact with financial services firms discussing the potential impact of negative interest rates. She said: "Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time."

How has the pound performed in 2021?

The pound has not enjoyed a good start to the new year, as it dropped against the euro and the dollar. The fact that the UK and EU reached an agreement on Christmas Eve has not made the situation better either, despite the hopes of some economists. Additionally, they are increasing concerns about the economy due to the stricter lockdowns. This has raised expectations of a further interest rate cut by the BoE.

The possibility of lower interest rates will also make UK money markets less attractive, turning investors away from the pound and towards other investments.

What do analysts and traders say?

Analysts expect that the upcoming Bank of England meeting on 4th February will garner a lot of attention, and as we get closer to it there will be growing speculation on the possibility of an interest rate cut.  

The pandemic has not helped either, as many economists believe that it has dampened sentiment towards Sterling and resulted in concerns about a slower economic recovery and a more cautious Bank of England. At the same time, other analysts disagree and do not expect an interest rate cut this February. Robert Wood, UK Economist at Bank of America said: "We do not expect the BoE to cut Bank Rate in February. Banks do not seem ready and some rate setters argue negative rates could be counterproductive when GDP is falling.” If this happens then the pound may rise.

With the pandemic and ongoing vaccinations, it is not yet clear how the UK economy will fair. Nonetheless, the UK government is committed to delivering CovidD-19 vaccines to the most vulnerable categories by mid-February. If everything goes as planned, and people are successfully vaccinated, then the BoE might reassess its plans and reconsider whether cutting interest rates is the best possible solution. If the economy shows signs of recovery, then the pound will respond favourably.

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With a lot less Brexit uncertainty and projected gains by 2022, the UK economy and the pound are expected to recover. In the short term, and due to lockdown measures, the pound will be weighed down by negative sentiment which will also lead to economic contraction. But economists are positive that following the rollout of vaccines there will be a sharp recovery in economic activity and investor sentiment which could see Sterling rising against major currencies such as the euro and dollar.  

The recent lockdown restrictions to control the spread of a new strain of the coronavirus will slow down the economy and hurt the pound, but a swing in sentiment might also be materialising soon as the market has reached its negativity point against the pound. Kit Juckes, Macro Strategist at Société Générale, has said that things will improve with the new vaccines and positive news about controlling the virus: "If the new lockdown does work, and more so if vaccine deployment does go quickly from here inwards, Sterling could have a good year. In the meantime, it seems clear that a lot of gloom is priced in already.”

England is currently under a strict national lockdown as the government struggles to rein in the rise in infection. On Wednesday, the UK recorded its greatest daily surge in coronavirus-related deaths since 21 April, with a total of 1,041 registered deaths.

Short-term forecasts for the pound

In the first quarter, the UK economy could contract due to further lockdown measures which will slowdown economic recovery. A rebound in economic activity, however, is expected immediately after the lockdown measures are lifted. With more vaccinations, as a 2 million weekly target is set to be successfully completed by the end of January, economists are hopeful that the economy will slowly bounce back. The government has obtained access to 100 million dosages of the Oxford-AstraZeneca vaccine, with tens of millions of vials to be delivered once the MHRA has quality checked them. There are more than 730 vaccination sites across the UK, and more are opening this week to provide access to Covid-19 vaccines to a wider group of people at risk. In this respect, as vaccinations increase, so will market sentiment towards the pound.

"We expect a gradual re-opening from early March onwards, with faster progress of normalisation thereafter as more people are vaccinated and springtime heralds the natural remission of seasonal respiratory viruses,” Kallum Pickering of Berenberg said. Analysts at Berenberg highlighted that the near-term outlook will be “much worse than before” and forecasted a 2% decline in the first quarter of the current year estimated growth of 6% for the whole of 2021. Kallum Pickering said that the forecast for the first quarter might be gloomy, but the second quarter will see “faster catch-up growth” of 9% and the third quarter is forecast to see 4.5% growth than the 2.3% previously.

Growth rebound in the Second Quarter

According to Pickering, the growth rebound in the second quarter of 2021 will be greater than originally estimated with +9% expected, against the 6% growth forecast previously. For the fourth quarter he sees 1.3% forecast versus 0.9% previously. Pickering said: “we now project an 11.5% decline in 2020 followed by gains of 6.0% in 2021 and a 6.5% gain in 2022 (previously -11.6%, 7.3% and 4.9%, respectively). Despite the near-term hit, the UK medium-term outlook remains positive. With much less Brexit uncertainty and strong gains in global demand ahead, UK real GDP can still recover to its pre-pandemic level by the end of 2022 as previously expected.”

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Sterling climbed against the dollar on Monday after the EU and UK announced that they will “go the extra mile” and continue with Brexit negotiations. 

After last week, when the pound fell due to concerns over a no-deal Brexit, this week the pound rose reversing some of its losses. The Prime Minister Boris Johnson and European Commission president Ursula von der Leyen agreed during a “constructive” call on Sunday to “go the extra mile” in order to secure a trade deal for the UK. With no deadline for negotiations, British officials have said that negotiations could continue until Christmas. 

What do analysts say?

Whatever happens to the pound is going to have an impact on Thursday’s Bank of England meeting which is expected to remain on hold. Analysts believe that if markets are worried and the pound falls on the prospect of a no deal, then the BoE might increase its QE purchases within a short period of time. Nonetheless, pound volatility as we near the end of 2020 is to be expected. 

Goldman Sachs has predicted that the pound will rise if there is progress towards a deal or a no-deal Brexit is avoided. Barclays analysts explained that there will be risks to the pound until an agreement is reached. As the Financial Times reported, some analysts have changed their mind, quoting Gregory Perdon, co-chief investment officer at Arbuthnot Latham, who had “second thoughts” about the pound rising, but he reiterated his hopes for a deal as  “both parties are probably better off economically with a deal.” “Let’s hope rationality wins in this instance,” he added. 

Others more pessimistic, have warned that the pound’s gains might be short-lived, as both the UK and EU have failed to reach a deal repeatedly in the past.

Talking to Reuters, Junichi Ishikawa, senior foreign exchange strategist at IG Securities said: “This is a temporary move higher in the pound, but it is still not clear that a no-deal scenario can be avoided.”

Whether there is a deal or no deal, some investors feel that the pound could still move sharply.

What’s next?

The UK left the European Union on 31 January 2020, but the ongoing negotiations between the UK and EU officials are focussing on securing and negotiating a deal about the rules that will determine and define the kind of relationship the two parties will have post-Brexit. Michel Barnier has commented that Boris Johnson has made a mistake for hoping to negotiate an agreement within only 11 months.

The two sides have until 31 December 2020 to agree a trade deal and, if there is a deal, border checks and taxes will be introduced. The transition period ends on 31 December, and tariffs and quotas will be introduced in the event of a no deal.

A joint UK-EU statement stated that “despite the fact that deadlines have been missed over and over we think it is responsible at this point to go the extra mile."

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Sterling rose after renewed hopes that a Brexit deal is still possible, as the UK Prime Minister Boris Johnson is heading to Brussels for a meeting with the President of the European Commission, Ursula von der Leyen. Heightened volatility is expected as the meeting could take place any time this week or over the weekend, with any rumours possibly to move the currency.

On Monday, the GBP suffered losses after news that the negotiations reached a stalemate, and the PM stated that he was willing to walk away. But, later, on Monday, as it was announced that Johnson would be travelling to Brussels for a face-to-face meeting with von der Leyen, the pound regained some of its losses. News about the meeting is not yet clear and markets expect the two to either meet on Wednesday or possibly Friday. On Thursday, a meeting of European Council EU leaders will also take place, and many predict that the meeting with von der Leyen could even take place in the weekend, to allow EU leaders to approve of a new mandate for the EU Commission President before the meeting.

With confidence dwindling and the possibility of a deal becoming more and more distant, markets will remain sensitive to any Brexit updates. While everyone was expecting Johnson and von der Leyen to discuss over the phone, the announcement of a physical meeting caught markets by surprise. At the current moment everyone hopes that a breakthrough could be reached by an intensification of negotiations at a more personal and political level.

What to expect for Sterling in 2021?

A lot depends on a positive Brexit outcome. The currency is also correlated with global business and economy, so any general positive upswings will also boost the pound. According to economists at Oxford Economics, global economy will expand and the UK will benefit from the trend, especially after being so badly impacted by the pandemic.

However, if both sides fail to reach an agreement, the Pound could fall below parity, as many believe there is much more downside risk than upside. There is a real risk to the outlook of the UK economy and the pound if a no deal outcome ensues, but, at the same time, there are multiple scenarios possible: a deal or no deal, as well as a so-called cooperative no deal and an uncooperative no deal. An uncooperative no-deal Brexit will be more disruptive than a cooperative no-deal Brexit, in which the EU and the UK will be able to cooperate on a number of pressing emergency issues.

The UK government announced on Monday 7th Dec. that they will remove those elements that the EU openly disagrees with in the possibility of a trade deal, including the law-breaking clauses of the Brexit Bill. However, the clauses might return if a trade deal is not agreed, which will point towards a hard, uncooperative no deal Brexit. In this scenario, the pound will fall to the lower end.

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The possibility of striking a Brexit deal before the weekend has helped to stabilise the pound as it recovered some ground, on Thursday. However, tensions are building ahead of the weekend as talks continue. This means that any Brexit-related headlines will create pound volatility and move the market considerably.

The clock is ticking

While markets are hopeful that a deal will be reached, the fact that the clock is now ticking with little space for manoeuvres means that the pound will remain sensitive. The Telegraph reported that Barnier told EU ambassadors that the UK has become more flexible and lowered its demands in regard to UK waters post-Brexit, demonstrating that the two sides are closer to an agreement. Fisheries and governance remain unresolved, with the latter to be negotiated once all other agreements are settled. Talks could now focus on the percentages involved in fisheries, but France might prove to be uncompromising on its fishing demands. According to The Telegraph, "Fishing nations such as France, Denmark, the Netherlands, Belgium and Spain fear Mr Barnier may cave too easily to British demands as talks enter their endgame. Paris insists the UK red line of annual fishing negotiations is unacceptable.” France has already clarified that it will veto any deal that goes against their interests.

A report in The Times said that "France and other hard-line countries are pushing for no deal in Brexit talks to soften up Britain before a reset in negotiations next year, unless the government makes significant concessions in the coming days," and unless the UK "backs down over the next 48 hours", a period of 'no deal' will "bring a chastened Britain back to the table next year".

The BBC's Europe Editor Katya Adler said that Brussels believe a deal will be possible in the event that the UK makes significant steps to meet the demands regarding fisheries, competition rules and governance.

Talks continue in London

Negotiations are at the final stages, but it appears that any last hurdles will require, maybe not divine intervention, but at least some help from leaders from the UK, EU Commission and France. Both Wednesday and Thursday, saw negotiators working well into the night for the final push.

On Friday, The Telegraph reported that talks will find Boris Johnson and Emmanuel Macron coming head to head this weekend, with France interested in securing access to fish in British waters.

According to certain sources, Macron's officials have been "lobbying hard" among different member states to agree to added demands on fishing, state subsidies and non-regression clauses, and these will be discussed by both the PM and the French president over the weekend.

EU member states could also veto any deal as they continue to have concerns about state aid mechanisms and how to enforce agreed environmental and labour standards. France and Denmark are reluctant to lose their fishing shares in UK waters.

Indeed, there is not much time left now, as negotiations continue and the upcoming EU leaders’ meeting on 10 and 11 December 10-11 means that a final deal needs to be ready to be agreed. Sterling will make significant gains if a deal is announced in the coming weeks and it could potentially continue to rise.

 

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The pound appears to have risen ahead of the weekend, as Brexit negotiations continue. EU ambassadors have been told that a trade and security agreement with Britain is almost ready to be finalised as gaps on the contentious issues are “slowly shrinking.”

Both sides however remain inflexible, with European politicians saying that there remains work to be done and the UK saying that the EU needs to compromise. The risk of a no-deal Brexit in six weeks is still high.

According to a Bloomberg article, the UK “hasn’t moved sufficiently to overcome the main obstacles to a post-Brexit trade deal as three of the bloc’s leaders called for contingency plans to be stepped up in case there is no agreement.” Secretary General of the Commission Ilze Juhansone told envoys from the EU’s 27 member states on Friday that “negotiations could now slip into December as progress has been slow.”

On the other hand, the report noted that "The U.K. government has said that both sides have already made concessions on the three remaining areas of disagreement - access to British fishing waters, the level playing field for business, and how any deal is enforced - but that it’s up to the EU to make the final compromises."

A report on Reuters, stated that EU diplomats reported that “The European Union and Britain remain at odds in last-ditch trade talks over fishing rights, guarantees of fair competition and ways to solve future disputes, even though they are very close to agreement on other issues.” A senior EU diplomat told Reuters that “We are both close and far away. It seems that we are very close to agreement on most issues but differences on the three contentious issues persist.” Officials will continue negotiations online, as on Thursday it was announced that direct talks were suspended after a member of the EU team tested positive for COVID-19.

Negotiations are stuck

Negotiations have not progressed much as both sides remain unyielding on the main points: “Some things on the level playing field have moved, albeit very, very slowly. Fisheries are not really moving anywhere right now.” In terms of state aid, Britain has offered to set up a regulator for corporate subsidies, as the EU requested, but this was rejected as the body needed to be independent from the government and with a clear authority. Another EU official said that “negotiators mostly focused on such elements of corporate fair play as well as divvying up fishing quotas in recent days: ‘Both of these are still very stuck.’”

Pound Rises despite Brexit deadlock

The pound has risen against the Euro, Dollar and other major currencies, as negotiations continue. Markets remain confident that both sides will strike a deal despite the persistence of major differences. In the possibility of a trade agreement being reached the next two to three weeks, the EUR is expected to fall, something that will also be supported by positive news about a vaccine for Covid-19.

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With the ongoing Brexit negotiations and unexpected volatility, contacting a currency specialist could save you time and money. If you are sending your family members money, 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 transfer needs.