British pound gains as shops reopen and NZ trade deal likely

• Pound Sterling (GBP) climbs as the next stage of easing UK lockdown restrictions gets underway
• Cautious trade supporting safe-haven US dollar (USD) and Japanese yen (JPY)
• British pound (GBP) long-term exchange rate views remain positive
• Pound Sterling (GBP) supported by news that a UK-New Zealand free trade deal is on the brink of being sealed

Pound Sterling (GBP) has been under considerable pressure in recent sessions amid a pick-up in risk-off trade and concerns over delays to Britain’s COVID vaccine rollout.

Last week, the UK currency recorded its worst week against the US dollar (USD) and the euro (EUR) since December and September, respectively.

However, several market analysts have attributed the recent weakness in GBP exchange rates to some profit-taking. They believe that the British pound (GBP) could find some stability going forwards, especially with the next phase of lockdown easing underway.

On April 12th, all non-essential stores, gyms, theme parks, zoos and restaurants, bars and pubs with outdoor seating areas reopened under stage two of UK Prime Minister Boris Johnson’s lockdown exit roadmap.

The move has boosted hopes of a swift recovery for the UK economy in the second half of 2021, especially compared to Europe, which has all but lifted lockdown restrictions.

Pound Sterling boosted up the UK economy’s reopening

The reopening of shops, pubs and other non-essential stores in England has already driven pound Sterling (GBP) higher against currency trading rivals on the first day of the new trading week, of which Pound sterling to Chinese Yuan (GBP/CNY) has been the largest beneficiary.

With vaccine gains expected to be short-lived as other countries vaccination programmes accelerate in pace, the easing of lockdown restrictions has come at an excellent time for the UK currency.

As we head into the North American session, the British pound to US dollar (GBP/USD) exchange rate is trading 0.2% higher at USD 1.3736 and could continue to recover as profit-taking prompts slide.

Meanwhile, the British pound to euro (GBP/EUR) exchange rate up by 0.15% at EUR 1.154 remains significantly lower than last week’s high of EUR 1.1803.

However, with confidence in the global recovery outlook being restored and shops in England reopening, this should generate some demand for GBP/EUR and drive the currency pair back towards yearly highs.

ING’s chief EMEA strategist for FX and bonds Petr Krpata and the rest of the strategy team has insisted that the British pound’s (GBP) fundamental appeal remains intact and expect EUR/GBP to retreat towards the GBP 0.85 level over the coming weeks as a result.

Lower-than-expected German industrial production data is also weighing on the single currency. Industrial production activity in Germany declined for the successive month in February, recording a slump of -1.6% ahead of consensus expectations for growth of 1.5%.

Improving optimism is also causing investors to turn more neutral on the US dollar (USD), albeit signs that the US Consumer Price Index accelerated sharply in March could trigger some headwinds for the GBP/USD pair.

However, according to currency forecasts from TD Securities, solid economic growth in the US may not necessarily translate into a stronger greenback.

Long-term exchange rate views on GBP optimistic

The financial services company expects the US dollar (USD) to continue to slide against the Japanese yen (JPY) and forecasts GBP/USD moving through to the USD 1.40 level year-end – a 2.2% advance from its current levels.

TD Securities long-term exchange rate view for GBP/USD is also positive, with the currency pair forecast to hit USD 1.44 in December 2022.

However, they expect the New Zealand (NZD) and Australian dollars (AUD) will struggle to negate potentially bearish momentum and remain relatively depressed against their US counterpart.

Risk concerns are also weighing on the British pound to Japanese yen (GBP/JPY) exchange rate, which is trading flat at JPY 150.3925.

With little economic data out this week, pound Sterling (GBP) exchange rates will continue to be driven by coronavirus developments and sentiment towards easing lockdown restrictions in England.

However, Tuesday’s release of UK gross domestic product (GDP) data and manufacturing and industrial production figures for February could offer GBP further support.

Consensus readings for UK GDP data expect a reading of 0.4% against January’s -2.4% slump, while industrial production figures and manufacturing activity is expected to rise to 0.4% month-on-month.

News that Britain is on the brink of securing a free trade deal with New Zealand could also drive GBP higher in foreign exchange (FX) markets.

Britain “close” to finalising a trade deal with New Zealand

According to UK Trade Secretary Liz Truss, Britain is on the brink of securing a free trade deal with New Zealand which would protect hundreds of jobs and deliver cheaper wine and meat imports from our Down Under neighbours.

In return for reduced taxes on wine and meats, Britain will increase exports of cars, gin and food to New Zealand, including iconic brands such as Kipling and Yorkshire Tea.

According to recent reports, a new deal would expand on existing trade links between the two countries worth GBP 2.9BN in 2019.

Ministers have been holding “rapid progress” talks to slash prices and safeguard jobs over the past year, and Ms Truss is confident about striking a deal during this week’s final round of discussions.

A source close to talks told reporters, “New Zealand is likely to be the next big deal we get over the line. It’s neck and neck between them and Australia, but there’s every chance we’ll close a deal with New Zealand first. A deal that would ­support jobs across Britain.”

New Zealand and Britain have a trade partnership that can be traced back to the 1960s when NZ exported approximately half of its exports to the UK.

After Britain joined the European Union, trade between the two nations declined significantly, and taxes on goods increased.

Now that Britain is no longer an EU member state, the UK government can negotiate a new agreement on NZ goods’ taxes. Ministers are prepared to do this if the country reciprocates with reduced tariffs on some of Britain’s exports, including motor vehicles.

The landmark trade deal would be a significant win for Brexit Britain, which could also provide some upwards momentum in pound Sterling (GBP) exchange rates.

While the New Zealand dollar (NZD) will also benefit, the NZ government’s recent action against rising housing prices could limit upside potential in the “Kiwi” currency.

The move, which has taken some of the pressure off the Reserve Bank of New Zealand (RBNZ), has lowered NZD across the board – to the central bank’s delight.

At the time of writing, the British pound to New Zealand dollar (GBP/NZD) exchange rate is trading 0.3% higher at NZD 1.9546. If the RBNZ signals that it remains poised to provide further fiscal support at its Wednesday rate statement, the currency pair could advance.