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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