COVID19: UK government could announce a new lockdown

• Euro (EUR) outperforms British pound (GBP) amid talks of a new lockdown in the UK
• Investors fear South African COVID-19 variant could be resistant to new vaccines
• UK Prime Minister Boris Johnson being pressured to introduce more stringent COVID restrictions
• UK Health Secretary Matt Hancock blames the rise in UK infection rate on the British public

Several major currencies are outperforming pound Sterling (GBP) on the first day of the new trading week, despite the broad-based optimism surrounding COVID-19 vaccine success with the Oxford/AstraZeneca jab being rolled out across the UK on Monday.

The euro to British pound (EUR/GBP) exchange rate has rallied by more than 1% today, with the currency pair currently trading at GBP 0.9041.

Although coronavirus cases in the EU are surging, Eurozone Manufacturing PMI data for December is buoying EUR sentiment.

According to IHS Markit’s final Eurozone Manufacturing PMI for 2020, production growth accelerated at the fastest pace month-on-month in the past three years.

The index jumped up from 53.8 in November to 55.2 in December, while manufacturing data from the bloc’s largest economy, Germany, increased to 58.3 – well above the 50 mark, which is the figure that separates contraction from expansion.

While UK Manufacturing PMI data for December was encouraging, with the index soaring to a three-year high of 57.6 from November’s 55.6, pound Sterling (GBP) gains are being capped by caution over the UK’s economic outlook.

Pound Sterling (GBP) slumped against a host of major currencies after UK Health Secretary Matt Hancock refused to rule out a third national lockdown due to concerns over the more contagious South African COVID-19 variant.

There have already been numerous calls for the UK government to impose more stringent COVID -19 restrictions to curb the coronavirus’s spread, which will have severe repercussions for the UK economy.

Some investors also fear that the South African COVID-19 variant could be resistant to new vaccines, which is increasing pressure on GBP exchange rates.

Pound Sterling slides against major trading partners

While the British pound to euro (GBP/EUR) exchange rate has registered some of the steepest declines, pound Sterling (GBP) is also trading sharply lower against other trading partners such as the Australian dollar (AUD).

At the time of writing, the British pound to Australian dollar (GBP/AUD) exchange rate has slumped by 0.2% to AUD 1.7706, with demand for the risk-sensitive “Aussie” being driven by Australia’s brighter economic outlook and the global rollout of vaccines.

GBP/AUD is also being weighed down by news that the world’s second-largest economy, China, could expand by 9% in 2021. As China is Australia’s largest trading partner, the Australian dollar (AUD) is benefiting from the news, albeit the festering trade war with China could undermine AUD underperformance.

While fears of a new lockdown in the UK is triggering headwinds for GBP, the UK currency has become more appealing following official confirmation a UK-EU Brexit trade deal.

If COVID-19 vaccines successfully reduce the number of cases across the UK over coming months, pound Sterling (GBP) could find bullish momentum in foreign exchange (FX) markets.

UK financial markets rally on Oxford/AstraZeneca COVID-19 vaccine rollout

UK shares jumped higher on the first day of the trading week in response to the Oxford/AstraZeneca coronavirus vaccine rollout.

London’s blue-chip FTSE 100 Index jumped up by more than 2% earlier in the session to 6,662.66. While the FTSE 100 has declined slightly heading into New York trading hours, the index continues to perform strongly and is 1.81% higher at 6,577.61.

Oxford/AstraZeneca’s jab is logistically superior to Pfizer’s vaccine, and as a result, vaccination programmes should gather pace across the world, which would typically prove pound-positive.

However, the spike in the UK infection rate is increasing downside pressure on GBP.

Mr Johnson has also come under growing pressure to close education institutions after he urged parents to send their children to school, stating there is “no doubt in my mind that schools are safe”.

When asked if he would close schools, the Prime Minister said: “We are keeping things under review” despite evidence showing that COVID-19 is spreading across schools.

Several politicians have urged the government to enforce more draconian measures, with Labour leader, Sir Keir Starmer, calling on a lockdown akin to the one imposed in November.

Scotland’s First Minister, Nicola Sturgeon, has already announced a nationwide lockdown in the country for January, with most schools expected to remain closed until February-end.

While Boris Johnson has not ruled out a new lockdown in England, Matt Hancock appears less enthusiastic about such measures, insisting it is the public’s responsibility to prevent the spread of the virus.

Speaking on Monday, the Health Secretary said: “It is down to people’s behaviour, frankly. What matters is, yes, of course, the rules that we put in place, but it is also about how people act.”

Despite the challenging situation facing the NHS, with hospitals across the country struggling to cope as the cases mount up, children are expected to return to schools in the coming days.

Health officials recorded more than 50,000 new COVID-19 infections for the sixth successive day on January 3rd, with the number of hospitalisations in the capital more than double than that a fortnight ago and far higher than figures recorded during the first peak in April.

While it remains unclear whether the UK government will impose a national lockdown, Boris Johnson said more stringent measures would be announced: “in due course”.

According to The Mirror, an official government source said ministers could introduce a Tier 5 level. Meanwhile, BBC science editor David Shukman said ministers might mandate a two-metre social distancing rule and reintroduce limits on outdoor exercise.