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UK vaccine rollout and reopening plans could underpin GBP

The US dollar (USD) is outperforming its major currency trading rivals such as the British pound (GBP) and euro (EUR) at the start of what is typically a strong month for the safe-haven currency.

At the time of writing, the British pound to US dollar (GBP/USD) pair is trading 0.2% lower at USD 1.3871, while the euro to US dollar (EUR/USD) exchange rate has slipped by 0.3% to USD 1.2014.

April was a turbulent month for the greenback, which fluctuated against a backdrop of improved global investor sentiment, monetary policy concerns and the COVID-19 crisis in Asia.

While an improvement in the global market mood could upend US dollar (USD) demand and send the currency lower in foreign exchange (FX) markets, seasonal drivers and robust economic indicators could see USD drift higher.

The US has also leapt ahead of the EU in the race to immunisation against coronavirus, meaning any potential losses against the euro (EUR) will likely be limited. Weakness in EUR/USD has become more compelling following last week’s report from Eurostat confirming that the Eurozone has entered a double-dip recession.

Many analysts believe the Eurozone’s economic deterioration will delay the likelihood of any policy tightening from the European Central Bank (ECB), thus undermining EUR strength.

Although a strengthening US economy could cause the greenback to lose its safe-haven appeal, US fundamentals point towards a more solid USD.

According to a recent Reuters study concerning the US dollar Index’s performance in each May over the last 21 years, the greenback has advanced 62% of the time.

That said, this time round, US dollar (USD) demand appears to be coinciding with expectations for the US economy to make a robust economic recovery in Q2 2021.

And with a host of economic data coming out of the US this week, including Friday’s headline labour data, investors are confident that positive figures will lead to a more hawkish move from the Federal Reserve (Fed), which would further support the USD.

However, pound Sterling (GBP) could also make a roaring comeback in currency markets on Thursday, following the Bank of England’s (BoE) all-important monetary policy announcement.

BoE policy update could trigger bullish momentum in GBP

The Bank of England will deliver its quarterly policy update on Thursday – a significant risk event for pound Sterling (BoE). Investors have become heavily invested in central bank policy-making as vaccination campaigns gain traction.

With the economic situation in the UK improving, many market analysts believe that policymakers could announce a tapering of stimulus measures, which would prove pound-positive.

Several UK banks, including Natwest and HSBC, are predicting such a move, arguing that the UK’s rapid vaccine rollout has evolved in a way that allows the British government’s unlocking plans to remain intact, which has boosted hopes of a swift Q2 2021 rebound.

The UK’s vaccination campaign is also set to accelerate in May, supporting economic revival plans.

From May 17th – subject to an assessment of data based on four tests – indoor hospitality firms in England can reopen. At the same time, gatherings of more than 30 people will be permitted outdoors, while groups of six or larger parties of two households can meet up indoors.

Some Foreign Exchange (FX) analysts have attributed pound Sterling’s (GBP) underperformance in April to the slowdown in the country’s vaccination programme, which faced delays after India put a hold on vaccine exports as the infection rate in the country spiralled out of control.

According to a recent news report, the UK currency could rediscover its vaccine-fuelled rally this month amidst robust supplies and a push to administer second doses to priority groups.

More than 50% of the UK population has received their first doses of a COVID-19 jab, while 23.3% of people or one in every five adults are fully vaccinated.

In a report published by iNews, it read: “If that timeline holds and supplies continue to flow, it suggests that the rollout will be several weeks ahead of its formal target, which is to give the vaccine to all adults by the end of July.”

Ministers are currently reviewing data from top scientific advisers to determine whether the next stage of UK Prime Minister Boris Johnson’s lockdown exit roadmap strategy can go ahead without posing any significant threat to the NHS.

Given that the UK’s COVID case count remains near the bottom of levels seen during the second wave last year, the threat of another wave is far less significant. As a result, plans to ease coronavirus lockdown measures further should be given the green light.

Recent PMI data publications also support the outlook for pound Sterling (GBP), particularly against the euro (EUR), which lost much of its appeal after data published by Eurostat last week revealed that the EU economy entered a double-dip recession.

GBP/EUR Forecast: Investors weigh up reopening data and BoE event

According to IHS Markit, the UK Manufacturing PMI came close to setting a record high in April after activity expanded by the fastest pace in nearly 27 years last month despite Brexit disruption and delays stemming from the Suez blockage.

Manufacturing activity in the UK jumped to 60.9 in April, beating consensus expectations for a rise to 60.7 and outstripping European numbers, most of which came in lower than forecasts.

While Eurozone’s final Manufacturing PMI rose to 62.9 last month from 62.5 in March, it was lower than the 63.3 preliminary estimates, which suggest that growth in the EU is slowing down.

The euro (EUR) mounted a brief recovery against pound Sterling (GBP) earlier in the session, supported by a shift in risk appetite. Still, gains have been short-lived as GBP has advanced heading into the North American session.

Currently, the British pound vs euro (GBP/EUR) exchange rate is trading 0.1% higher at EUR 1.1544. However, the currency pair could extend gains as EUR came under renewed pressure last week after official data revealed that the bloc contracted for a second consecutive quarter.

That said, GBP/EUR must also navigate the Bank of England’s (BoE) policy decision, Scotland’s election, global coronavirus developments and risk sentiment over the coming week.

Although several analysts have said that the outcome of the Scottish election is unlikely to impact GBP exchange rates significantly, the BoE meeting is expected to set the tone for the UK currency throughout May.

Traders will be looking out for a hawkish shift in the face of the UK’s economic revival, which could see GBP/EUR return to highs of EUR 1.18 seen in early April.

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