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British pound storms to new highs against US dollar and euro

Pound Sterling (GBP) has rallied to fresh highs against a host of major currencies at the start of the new trading week, with bullish momentum driven by rising global stock markets and confirmation that the UK has reached its vaccination target.

The British pound to US dollar (GBP/USD) exchange rate stormed to USD 1.3913 in the wake of the news – its highest level since April 2018. Meanwhile, the British pound to euro (GBP/EUR) exchange rate jumped to EUR 1.1467 and now appears to be eyeing the EUR 1.15 level.

Axi Market Analyst, Milan Cutkovic, says he sees the British pound (GBP) testing the USD 1.40 level and extending gains against EUR.

Since the UK and the EU secured a post-Brexit trade deal, pound Sterling (GBP) has become increasingly aligned with movements in global stock markets, rallying when equities are rising and falling when investor sentiment fades.

With the world’s major indices all stronger this morning, the improved “music” mood in stock markets is aiding gains in GBP crosses.

While GBP could become vulnerable in the second half of the year as data reveals the impact new Brexit trade rules had on the UK economy, GBP fundamentals are improving so losses could be limited.

The UK’s lead in the race to immunisation has put a solid floor under pound Sterling (GBP) in recent weeks, and the UK currency could extend its winning streak in the near-term if UK vaccine optimism remains intact.

UK government signs a coronavirus vaccine deal

UK vaccine optimism primary driver of pound Sterling upside

Hopes that Britain’s vaccination rollout will result in the UK economy being unlocked earlier than its peers is also driving pound Sterling (GBP) higher on Monday.

Even high-beta currencies such as the New Zealand dollar (NZD), which stands to benefit more from risk appetite are trading on the defensive against pound Sterling (GBP).

At the time of writing, the British pound to New Zealand dollar (GBP/NZD) exchange rate is trading near one-month bests at NZD 1.9218.

On Sunday, the UK government said Britain had achieved its target of vaccinating 15 million of its most vulnerable residents – a day earlier than the February 15th deadline.

UK Prime Minister Boris Johnson said that the UK had achieved an “extraordinary feat”. While Vaccine Minister, Nadhim Zahawai noted, “the country would not rest until all nine priority groups had been vaccinated by the end of April and then adults.”

The UK has now vaccinated 22% of its total population, a development that scientists say should reduce the pressure on the NHS and allow for a more sustainable and permanent exit from lockdown.

According to official statistics, Britain’s vaccine rollout also appears to be positively impacting the coronavirus infection rate in the country, as the number of new daily cases fell for another successive session on Sunday to 10,972.

The UK’s COVID-19 death toll is also following a sustained decline; however, this led to growing pressure on Prime Minister Boris Johnson to ease lockdown restrictions.

Several MPs have made calls for the Prime Minister to lift all lockdown measures by April-end, the date by which the government hopes to have vaccinated all residents in the UK’s nine priority groups.

Boris Johnson is expected to unveil his lockdown exit roadmap on February 22nd.

US dollars, euros and pound Sterling

Euro and US dollar vulnerable to broader risk-on mood

Although the United States’ vaccination programme is well underway and the EU appears to have finally got a handle on vaccine chaos across the Eurozone, both are still significantly behind the UK in the vaccine rollout.

Nordea FX noted that the EU “also chose to emergency-approve the vaccines instead of sticking to a bureaucratic process, which has resulted in the first simple post-Brexit match-up a big 1-0 to the UK versus the EU so far.”

Ongoing concerns over the EU’s laggard vaccine rollout has weighed on the single currency in recent weeks, which has dragged the euro to British pound (EUR/GBP) exchange rate down from highs.

However, signs of the vaccine situation in the bloc improving could offer EUR/GBP a boost over the coming weeks, given that the Eurozone economy is in better shape than the UK.

That being said, any potential upside in the euro (EUR) and the US dollar (USD) could be capped by positive investor sentiment, which tends to support the riskier pound Sterling (GBP).

Elias Haddad, a senior strategist at Commonwealth Bank of Australia already believes “GBP/USD is deeply undervalued relative to the level implied by US/UK GDP price deflators and real UK‑US interest rate differentials.”

Foreign exchange (FX) market participants also anticipate a USD 1.9TN stimulus bill from the Biden administration, which could further undermine the safe-haven greenback in currency markets.

While the US Dollar Index (DXY) is above the downtrend from March 2020, the outlook remains gloomy, and recent technical developments suggest that the greenback’s longer-term view is bearish.

With major indices near record highs, strong risk appetite should also continue to offer significant support to GBP/EUR and GBP/USD crosses.

USD traders will be eyeing upcoming economic indicators out of the United States this week, with US inflation data in focus on Wednesday. If the US CPI reading is weaker than expected, this could reinforce the Federal Reserve’s (Fed) lower for longer stance, which would weigh on the US dollar (USD).

With no high impacting UK economic data out for release today, GBP traders will continue to take cues from coronavirus developments on Monday. However, Wednesday will be a critical day for GBP with UK inflation data, retail sales & PMI data all scheduled to be released.

EUR traders will most likely be looking to Tuesday’s publication of German ZEW Economic Sentiment data and Eurozone gross domestic product (GDP) figures for Q4 2020.

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