GBP/USD and GBP/EUR surge higher amid UK COVID optimism

• The British pound (GBP) extends its winning streak against the euro (EUR) and US dollar (USD)
• GBP traders eyeing the Johnson-Sunak meeting regarding the budget and lockdown exit roadmap
• Optimism over global recovery could support pound Sterling (GBP) exchange rates

Pound Sterling (GBP) maintains its status as the best performing G10 currency following a week that saw the currency surge to fresh 2020 highs against the euro (EUR) and GBP/USD cement itself above the USD 1.40 level.

Despite Friday’s publication of disappointing retail sales data, the British pound to euro (GBP/EUR) rallied above EUR 1.15 ahead of the weekend.

Although US dollar (USD) weakness should have renewed strength in the euro (EUR), the single currency failed to capitalise on the greenback’s misfortune amid ongoing caution over Eurozone’s economic outlook.

While growing optimism could give the euro (EUR) a boost in currency markets, pound Sterling’s (GBP) strong appeal could make it difficult for the euro to British pound (EUR/GBP) exchange rate to advance.

The UK’s world-leading COVID-19 vaccine rollout program has buoyed hopes of an earlier easing of COVID lockdown restrictions, continues to underpin pound Sterling (GBP) exchange rates.

The GBP/EUR currency pair recorded a fresh 2020 high on Monday after storming to EUR 1.15778 earlier during the session and was last seen trading around EUR 1.1566.

Meanwhile, the British pound to US dollar (GBP/USD) exchange rate breached USD 1.40 for the first time since April 2018. Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd, said that a “break past USD 1.40 level could potentially open the door to the 2017 high of USD 1.4439.”

The UK Prime Minister Boris Johnson

However, several foreign exchange (FX) market participants have said that the UK currency could lose its edge if UK Prime Minister Boris Johnson’s COVID roadmap disappoints and Britain exits lockdown slower than expected.

Although the number of daily coronavirus cases in the UK is now following a downward trend, the UK government’s approach to easing lockdown restrictions will also depend on vaccine data, mortality rates and hospitalisation figures.

According to official statistics, 17,582,121 people in the UK have received their first COVID-19 vaccine dose – more than a third of its adult population and a significantly higher proportion of people than that accomplished in the Eurozone and United States.

However, comments made last week warned against lifting lockdown restrictions prematurely or too quickly as this could see the UK government err on the side of caution with its COVID-19 lockdown exit strategy.

Suppose PM Boris Johnson occupies a more cautious stance and delays the UK economy’s reopening, GBP bulls will likely be disappointed, and pound Sterling (GBP) could head lower in FX markets.

The British pound’s (GBP) recent outperformance has been driven by expectations that the UK’s rapid vaccine rollout will lead to the economy unlocking ahead of peers.

In that view, a slower lifting of lockdown restrictions could weigh on expectations for a swift recovery, which, in turn, would see GBP/USD and GBP/EUR come under some fresh selling pressure.

All eyes will be on UK Prime Minister Boris Johnson’s unveiling of the UK’s lockdown exit roadmap on Monday evening.

GBP could come under pressure if UK lockdown exit strategy disappoints

Pound Sterling’s (GBP) recent advance against the US dollar (USD) and the euro (EUR) has been triggered by expectations that Britain’s world-leading vaccination programme will result in the UK economy staging one of the world’s earliest economic rebounds.

Earlier this month, the Bank of England (BoE) dismissed negative rate speculation and revised its forecasts for the UK economy. The central bank projected a second-quarter bounce under the impression that the UK’s vaccine rollout would result in lockdown restrictions being lifted on a more sustainable basis.

Despite hopes that the UK’s top four priority groups will receive their second vaccine doses in April, which would reduce the risk of transmission and severe illness by up to 85%, the apparent success of its vaccine campaign doesn’t appear to be enough to exit lockdown.

The Prime Minister will unveil the full details of his lockdown exit roadmap to the Commons on Monday evening. If Mr Johnson delays easing lockdown measures, this will likely shackle the economy to further economic downturn and undo pound Sterling’s (GBP) advances.

The British pound (GBP) could also come under pressure following Chancellor Rishi Sunak’s Spring Budget announcement, which he will deliver on March 3rd.

There have been several calls for Mr Sunak to extend the furlough scheme, especially from the hospitality, retail and nightlife sectors which have taken a significant hit from lockdown restrictions.

In the Conservatives manifesto commitments, the Tory government pledged to leave income tax, National Insurance Contributions (NIC) and VAT unchanged during their rule. However, the UK’s dire economic situation could prompt Rishi Sunak to backtrack on these commitments to return UK public finances to a sustainable level.

If the Chancellor’s measures fail to restore business confidence or are seen as economically damaging, this could hurt GBP exchange rates.

However, given that the UK currency has become increasingly correlated with risk-on trade, global reflation trade could limit the potential for loss.

Global reflation trade could continue to support pound Sterling

Although the British pound (GBP) is exposed to downside risk, the ongoing improvement in global investor sentiment could ensure the UK currency remains elevated over the coming weeks.

Following the UK-EU Brexit trade deal, pound Sterling’s (GBP) correlation with global economic moves has strengthened. The UK currency tends to outperform when equity market conditions are strong and decline in reverse.

In recent weeks, risk appetite has been boosted by a pick-up in global vaccine rollouts, expectations for a generous US stimulus package and rising commodity prices, with oil prices posting 12-month highs.

Although there has been a pullback in risk sentiment on Monday, which has seen the FTSE 100 Index has declined by 0.67% or −44.0 points to 6,579.95, the overall mood in currency markets remains relatively upbeat.