Can GBP extend its vaccine-driven climb against EUR and USD?

Pound Sterling’s (GBP) recent rally against a host of major currencies appears to have run out of steam of late, which could be a tell-tale sign that investors have already priced in the UK economy’s vaccine-fuelled recovery into GBP exchange rates.

However, the UK is reportedly preparing to accelerate its vaccination programme further over the coming week, which could renew bullish momentum in the pound (GBP).

Pound Sterling (GBP) has been one of the best performing major currencies of 2021 and has advanced to multi-month highs against several of its trading rivals, including the US dollar (USD) and euro (EUR).

While optimism over the UK’s vaccine rollout could continue to support GBP, some market analysts have said that the British pound (GBP) is overvalued. They argue that pound Sterling’s (GBP) recent outperformance could result in year-end declines.

New one pound sterling British sterling coin. Sterling reaction to UK employment data

Pound Sterling upside depends on the UK’s vaccine-driven recovery outlook

The British pound to US dollar (GBP/USD) exchange rate is trading around USD 1.388, while the British pound to euro (GBP/EUR) exchange rate has consolidated above EUR 1.16.

GBP’s recent gains have been triggered by the speed of Britain’s vaccine rollout, with a significantly higher proportion of the population inoculated against the virus compared to the US and EU.

Given that GBP fundamentals remain weak, analysts have said any potential for further upside will likely be dependent on the UK maintaining this advantage.

If Britain can remain out front in the race to immunisation, “GBP/EUR, which is edging towards the EUR 1.17 level, could challenge fresh 1-year highs,” says George Vessey, UK Currency Strategist at Western Union Business Solutions.

Britain’s world-leading vaccination programme supports the country’s economic recovery outlook and should enable UK Prime Minister Boris Johnson’s lockdown exit roadmap to come to fruition.

However, some analysts have expressed concern over pound Sterling’s (GBP) dependency on the vaccine rollout, especially as recent data from shows that the pace of vaccination has stalled – allowing other countries to catch up.

The British pound vs euro (GBP/EUR) currency pair has benefited significantly from the UK’s lead in the vaccine game. Having opened at EUR 1.1328 at the start of the year, GBP/EUR rallied to a high of EUR 1.1708 on February 24th and remains well supported at the EUR 1.168 level today.

Although EU countries are beginning to increase the pace of vaccination, recent reports suggesting that the UK could inoculate 500,000 people a day from next week, should open the door to further gains in GBP/EUR.

The euro (EUR) could also suffer some collateral following tomorrow’s European Central Bank (ECB) interest rate decision.

European Central Bank policy decision in focus

The ECB will deliver its latest monetary policy statement on Thursday. According to the latest reports, policymakers are divided on whether further fiscal action is needed due to recent moves in the currency market stemming from rising US bond yields.

Bank of France Governor Francois Villeroy de Galhau has insisted that the ECB act on any “unwarranted tightening”, pinning the rise in yields to “excessive spill overs” from the anticipated USD 1.9TN stimulus bill for the US economy.

Other policymakers have said the rise in US yields has been triggered by inflation concerns and have warned that this could have consequences for economic activity across the bloc.

However, Societe Generale economist, Anatoli Annenkov, wonders if the recent panic over rising US yields is overblown. He stated: “Markets may be a little bit ahead of themselves, but we haven’t seen anything in real interest rates that would hurt the recovery.”

The ECB may also be inclined to alter policy settings amid growing concerns over EU output for 2021. Although Eurozone fourth-quarter gross domestic product (GDP) came in better-than-expected, negative growth expectations for Q1 2021 is darkening the bloc’s recovery outlook.

Recent data from Eurostat also revealed that employment growth stalled by 0.3% in Q4 2020 after seeing growth in Q3, which is unnerving investors.

Meanwhile, the USA, which is poised to unleash a massive USD 1.9TN stimulus package, is forecast to record growth of 6.5% in 2021, up sharply from earlier predictions of 3.2%.

With Europe at risk of becoming the laggard in recovery outlook, all eyes will be on the ECB’s policy meeting on Thursday, which will likely prompt some decisive action in EUR exchange rates.

US dollar

Is the US dollar poised for further gains?

After tumbling in overnight trade, the US dollar (USD) has been reclaiming ground against major trading rivals in the Asian and European session.

The British pound to US dollar (GBP/USD) cross, which recorded a high of USD 1.3914 earlier, has tumbled to USD 1.3869, and today’s inflation data could push the currency pair lower if it renews concerns.

The euro to US dollar (EUR/USD) exchange rate has also come under pressure in midday trade and is trading flat at USD 1.189. All risk-sensitive currencies, including the Australian and New Zealand dollars, are underperforming against the greenback.

Treasury yields have soared amid growing expectation that Joe Biden’s US stimulus package will result in a faster-than-expected economic rebound and trigger a spike in inflation.

According to the Organization for Economic Cooperation and Development (OECD), the US economy will rebound twice as fast as previously estimated in 2021 once the House approves newly-appointed President Joe Biden’s USD 1.9TN stimulus bill.

The OECD note that Biden’s COVID relief bill, combined with the global vaccine rollout and declining coronavirus cases, will spark a robust economic recovery in the US, while other countries like those in the EU risk falling behind due to ongoing virus woes.

However, the OECD did note that a robust recovery in the US will aid global economic growth, which should boost risk-sensitive currencies such as the British pound (GBP).

According to the OECD, US economic output will increase by an additional 3.3% this year from 3.2% to 6.5%, which will lift global growth to 5.6% – up from December’s 4.6% projection.

Although the US dollar’s (USD) recent appreciation has caused some analysts to readjust their positions on the greenback’s long-term outlook, many maintain the view that the USD will weaken throughout 2021.

Any further signs of a significant recovery getting underway in the US over the coming months could also reduce the appeal of the safe-haven greenback and encourage investors to pile into risk.

Currency strategists at the Commonwealth Bank of Australia (CBA) also believe Cable is undervalued and anticipate further upside in GBP/USD throughout the year. While higher yields are posing a threat to GBP advances, they note that the UK’s improving economic prospects and smaller current account deficit should unlock further gains in the long-term.

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