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.
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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