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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