Pound Sterling gains but vaccine supply chain risks weighing

• Pound Sterling (GBP) gains ahead of the weekend courtesy of improved risk appetite
• UK and EU vow to co-operate on Coronavirus vaccine rollouts
• France insists that the EU will not be blackmailed by the UK over vaccine supplies
• Canadian dollar (CAD) supersedes the British pound (GBP) as 2021’s top-performing currency

Pound Sterling (GBP) edged higher against a host of major trading rivals on Friday after the European Union and the UK released a joint statement vowing to create a “win-win vaccine situation for both sides.”

While the details remain uncertain, foreign exchange (FX) market participants have exerted bullish pressure on the British pound (GBP), particularly against the safe-haven US dollar (USD), euro (EUR) and Japanese yen (JPY).

With more than 50% of the UK’s adult population vaccinated against COVID-19, news that vaccine exports from the bloc will continue to flow seamlessly into the country has restored confidence in Britain’s economic recovery outlook.

However, European leaders told AstraZeneca that it could not export any more of its COVID jabs from Europe until it honours its contractual agreement and delivers the agreed amount of doses to the continent.

FX analysts have linked pound Sterling’s (GBP) bullish behaviour to Britain’s progressive vaccination programme, which has placed the UK among one of the world’s first countries to lift lockdown restrictions and reopen the economy.

A UK minister also said that the UK has sufficient supplies to achieve its target of inoculating all adults by July-end.

His comments come as German Chancellor Angela Merkel comes under fire over the reimposition of more stringent lockdown restrictions in Germany.

Although the Institute for Economic Research (IFO) revealed that the Business Climate Index beat consensus expectations and jumped to 96.6 – its highest level in two years, Chancellor Merkel made an embarrassing u-turn on plans to tighten COVID restrictions.

The German leader retracted her position for a strict lockdown over Easter after opposition politicians set out to hold a no-confidence vote over the Chancellor’s ability to lead Germany out of the pandemic.

Nonetheless, with a third coronavirus wave spreading across the continent, bearish pressure on the euro (EUR) remains intact, particularly as other European countries such as France and Italy have extended lockdown restrictions.

At 17:00 GMT, the British pound to euro (GBP/EUR) exchange rate is trading 0.2% higher at EUR 1.17 and up 0.44% on the week.

Today’s release of UK retail sales data is also contributing to pound Sterling (GBP) strength. According to the Office for National Statistics (ONS), retail sales figures fell in line with consensus forecasts and edged higher during February – a move which suggests Britain’s wheel of economic fortunes could be turning positive.

Berenberg senior economist, Kallum Pickering, wrote in a note to clients: “A successful vaccine rollout, aggressive policy support and a solid global backdrop set the stage for at least two years of rapid economic rebound from the massive pandemic shock of 2020.”

However, while the UK’s world-leading immunisation programme has brightened its recovery outlook relative to other European countries, its vaccine supply could be heading towards troubled waters irrespective of co-operation with the EU.

Will vaccine headwinds dampen the UK’s economic prospects

Indeed, Britain’s progressive vaccine rollout has created a more stable and attractive environment for investors in the UK, particularly versus Eurozone countries, which have been plagued by vaccine supply issues.

However, it has come to our attention that India has banned exports of the AstraZeneca jab to an abundance of nations, including the UK, as it seeks to prioritise shots for local vaccinations amid signs of a second wave spreading across the country.

Given that India is one of the world’s biggest vaccine producers, the news has delivered a massive blow to nations anticipating vaccine doses from the country.

According to recent reports, a shipment of five million doses bound for the UK has been delayed.

The NHS has already stopped vaccinating first-time patients with the Pfizer-BioNTech jab to ensure they have sufficient supply to vaccinate those due to receive their second doses.

UK Health Secretary Matt Hancock has responded to the news and insisted that Britain is still on track to hit its vaccination targets. Still, increased prospects of open-ended delays could weigh on sentiment in currency markets.

France has also accused the UK of “blackmailing” the EU into a deal over vaccine exports, and rising political tensions could also reduce the appeal of GBP, albeit vaccine headwinds are more likely to impact EUR/GBP.

While further GBP volatility is likely over the coming week, investors appear to be relatively upbeat towards pound Sterling (GBP) heading into New York trading hours, as the UK currency is higher across the board.

GBP/ZAR exchange rate advances following SARB decision

The British pound to South African rand (GBP/ZAR) exchange rate has jumped higher by 0.3% at the time of writing to ZAR 20.6947, albeit some analysts have attributed upside to ZAR weakness rather than pound Sterling (GBP) strength.

The South African rand (ZAR) faced some heavy selling pressure after the South African Reserve Bank (SARB) decided to leave its primary repo rate at record lows and policymakers delivered a relatively dovish outlook of the South African (SA) economy.

Investors had expected the SARB to take a more hawkish tone. Aside from the slight upwards revision to growth forecasts, the central bank’s comments regarding new coronavirus cases weighing on local and global economic activity left little room for confidence.

However, as pound Sterling (GBP) exchange rates lack bullish conviction, any positive South African economic indicators out next week could offer ZAR/GBP some support in currency markets.

The British pound (GBP) will have to navigate UK gross domestic product (GDP) data, Nationwide Housing Price Index and manufacturing PMI in the week to come.

CAD supplants GBP as 2021’s top-performer

Pound Sterling’s (GBP) 2021 rally has taken a hiatus as investors digest the UK-EU vaccine spat, growing risk of Europe’s third wave washing up on British shores and unresolved Brexit tensions.

As a result, the Canadian dollar (CAD) has dethroned the UK currency as the best major of the year. CAD has also found support from rallying oil prices, the Bank of Canada’s (BoC) policy decision and the currency’s positive correlation to a stimulus-pumped US economy.

After surging to a multi-month high of CAD 1.78691, the British pound to Canadian dollar (GBP/CAD) exchange rate is trading flat on Friday at CAD 1.7347. Further weakness is also likely given that CAD is a leading contender for a period of long-term outperformance.

The “Loonie’s” long-term outlook is being boosted by comments from the BoC, which signalled an earlier reduction of its Quantitative easing (QE) programme and raised expectations for an early rate hike at its latest monetary policy meeting.

While the central bank has attempted to push back against those bets, after indicating that it would pack up its pandemic-fighting toolbox as early as April, CAD has gained positive traction.

Whether pound Sterling (GBP) can strengthen against the Canadian dollar (CAD) and return to highs of CAD 1.78 will largely depend on Britain’s post-Brexit economic resilience and whether the country can overcome fresh vaccine concerns.