The British Pound’s sell-off extends into the midweek session and sees the currency record a new six-week low against the U.S. Dollar and a two-week low against the Euro.
Investors turn increasingly pessimistic about the global economic outlook. However, some analysts we follow says the Pound should ultimately remain well-supported thanks to the country’s vaccine rollout program.
Pound Sterling at Risk
The Pound has become increasingly synchronised with global factors since the signing of the EU-UK trade deal in December 2020, meaning that it can now often rise when global stock markets are rallying but fall when they decline.
“The pound has been behaving more like a risky asset than a safe haven one since the start of the pandemic. Indeed, the correlation between the FTSE 100 and the pound has risen sharply since the start of 2020,” says Paul Dales, Chief UK Economist at Capital Economics.
Stock markets have fallen into the red this week as investors fear the global economy’s exit from covid-19 restrictions will be slower than initially expected, thanks to surging cases in Europe and a slow global vaccine rollout.
“The darkening outlook over Europe pulled global equity markets lower,” says Raffi Boyadjian, Senior Investment Analyst at XM.com.
Given the Pound’s increased correlation with equity markets, the Pound has understandably declined, with the Pound-to-Euro exchange rate going back below 1.16 to register a weekly low at 1.1566 Pound-to-Dollar exchange rate fell to a six-week low of 1.3700.
Despite an unhelpful backdrop, other Pound drivers are potentially more supportive, leading to a view amongst some analysts that the currency’s drop in value might be a short-lived phenomenon following a frantic bout of appreciation in January and February.
Underpinning a broadly supportive fundamental stance on the UK currency is a relatively rapid vaccine rollout, which has meant more than half the adult population has received at least one shot of a vaccine. Therefore, the question is, how long do investors ignore the supportive domestic picture and instead trade the UK currency according to global trends? This balancing act will likely dictate Sterling direction over coming days and weeks.
“The UK is gradually reopening supported by fast vaccinations, which, combined with businesses getting used to the new EU-UK trading relationship, means that the outlook for the UK economy looks much brighter,” says Mikael Olai Milhøj Senior Analyst at Danske Bank.
Danske bank expects the UK economy to outperform the euro area this year, supporting their view for a higher Pound-to-Euro exchange rate in 2021.
Danske Bank forecast the Pound-Euro exchange rate to trade at 1.2050 in three months, ahead of a move back down to 1.19 in six months.
However, near-term vaccine supply constraints could impact the rollout of the vaccine in the UK, which could give investors reason to pause their bullish assessment of the currency in the near-term.
“The growing risk of a serious disruption to the vaccine supply chain weighed on the euro and pound, while boosting the US dollar,” says Boyadjian.
The government last week wrote to vaccine centres warning of a sharp drop in vaccine supplies from March 29, owing to the delay of an expected shipment of some 5 million doses from the Serum Institute in India.
Furthermore, some 1.5 million doses of a batch from AstraZeneca would require retesting.