GBP/USD and GBP/EUR gains fade ahead of UK GDP data

• British pound to euro (GBP/EUR) exchange rate and British pound to US dollar (GBP/USD) exchange rate depreciates
• Stronger equities could underpin pound Sterling (GBP) in near-term
• UK vaccination programme expected to limit GBP losses
• UK gross domestic product (GDP) data forecast to contract for Q4 2020

The British pound to US dollar (GBP/USD) exchange rate has fallen back below the USD 1.37 level on the first day of the new trading week to USD 1.3685 after rallying to a 34-month high of USD 1.3757 last week.

Similarly, the British pound to euro (GBP/EUR) exchange rate is also trading on the backfoot in foreign exchange (FX) markets today, climbing down from 8-month highs to EUR 1.138.

While pound Sterling (GBP) could reverse its fortunes if global risk appetite holds firm and the greenback sheds gains, GBP faces some headwinds with UK gross domestic product (GDP) data for Q4 2020 out on Friday.

Economists expect the UK economy will have shrunk during the last three months of the year due to the second lockdown’s impact in November, which is triggering some unfavourable price action in GBP exchange rates.

Concerns raised over the efficacy of the AstraZeneca/Oxford vaccine against new COVID strains and the elderly could also be a potential headwind for pound Sterling (GBP).

Although AstraZeneca/Oxford is yet to post its full-year results, the pharmaceutical firm hit back at claims over the efficacy and safety of its vaccine, stating “100% of older adults generating spike-specific antibodies after the second dose.”

AstraZeneca chief Pascal Soriot, said: “We have strong data showing solid antibody production against the virus in the elderly, similar to what we see in younger people.”

Investors will closely monitor vaccine developments and hiccups in vaccination programmes, with any signs of a supply shortage similar to that seen in the EU, expected to impact equity markets and risk assets negatively.

The US is reportedly facing some shortfalls in vaccine availability. Chief medical adviser to US President Joe Biden, Dr Anthony Fauci warned there is “far more demand than supply in the US.”

According to the latest statistics, more than 30 million Americans have received their first vaccine doses. While vaccine rollouts are buoying hopes for a return to normalcy in the country, investors are also awaiting a US stimulus package, which depending on its size could trigger some sharp moves in financial markets.

Meanwhile, pound Sterling (GBP) will be driven by the UK’s vaccination drive and growth figures, with the UK’s upcoming GDP data release expected to assert some downside pressure on the GBP.

UK GDP data will determine the direction of GBP

Britain takes centre stage this week due to a slew of economic data releases out on Friday, notably Q4 2020 GDP figures, which will reveal whether the UK economy is heading for a double-dip recession in 2021.

While Q3 2020 GDP data beat forecasts after increasing by a record 16%, economists have predicted a modest contraction in Q4 due to the November lockdown’s impact, which saw all non-essential stores, leisure, entertainment venues, bars and restaurants close.

Although experts expect private consumption and government spending to support economic growth, preliminary estimates suggest the UK economy will contract by 0.9% in Q4 2020.

Furthermore, as 2021 started with more stringent and prolonged coronavirus restrictions, the UK faces its second double-dip recession on record.

Manufacturing and industrial production data are also out on Friday. If the stats reveal that activity in the sector came close to stalling in December, this could also weigh on GBP exchange rates.

However, as pound Sterling (GBP) fundamentals remain primarily supportive, with the UK’s vaccine programme appearing to help suppress transmission effectively, this could limit losses in the UK currency.

The Bank of England (BoE) also removed a potential headwind for GBP after policymakers dismissed implementing negative interest rates under the impression that the UK’s vaccine rollout will trigger a swift economic recovery.

Reduced uncertainty following the Brexit agreement could also coax international investors back towards UK equities, as these will likely become a more attractive option amid growth optimism.

GBP/EUR exchange rate forecast to extend gains

Although GBP is sliding ahead of UK GDP data, FX analysts have raised their forecasts for the British pound to euro (GBP/EUR) exchange rate due to EU political headwinds and the bloc’s notably slow vaccine rollout.

Credit Suisse FX analysts said: “Given that the currency pair started 2021 at EUR 1.1132 and  the bloc is poised for further weakness due to political strife and slow vaccine rollouts, we downgrade our expectations for EUR.”

Credit Suisse Trading Strategist, Shahab Jalinoos, noted that the EU’s Article 16 blunder has triggered “potentially worrisome long-term implications for the euro area”.

He said that the EU’s “lack of sensitivity to the many complexities involved by triggering Article 16 had created a very negative perception” and some now feel that the EU Commission is unfit to handle the pandemic, following its petty response to the UK.”

Meanwhile, the UK’s lead in the race to immunisation continues to boost the country’s recovery outlook, which supports GBP/EUR. If Britain continues to vaccinate at an accelerated pace, this places the country on course to unlock its economy on a more sustainable basis and before peers.

According to international vaccination tracking figures from Our World in Data, the UK has now inoculated 16% of its population, compared to the United States (10%), Germany (3.5%), France (2.80%) and Canada (2.69%).

With the UK significantly ahead of its European neighbours in the vaccine race, this could deliver further GBP/EUR upside in the coming weeks.