Pound Sterling hits new highs amid COVID-19 vaccine optimism

• Hopes for a robust UK economic rebound in Q2 is driving momentum in pound Sterling (GBP)
• British pound to New Zealand dollar (GBP/NZD) exchange rate direction to be determined by Royal Bank of New Zealand (RBNZ) decision
• South African rand (ZAR) tumbles against the British pound (GBP)

Pound Sterling (GBP) maintains its status as the best-performing G10 currency, extending its winning streak against a host of rivals, including the US dollar (USD), euro (EUR), riskier New Zealand dollar (NZD) and South African rand (ZAR).

The British pound to US dollar (GBP/USD) exchange rate rallied to fresh multi-year highs earlier during the session, supported by COVID-19 vaccine optimism and expectations for a robust UK economic rebound.

According to official government data, the UK achieved its target to vaccinate 15 million of the country’s most vulnerable adults over the weekend, fuelling hopes of the economy being unlocked earlier than peers.

While the GBP/USD currency pair is softer heading into the North American session at USD 1.3929 following a bout of more cautious trade, pound Sterling (GBP) is expected to build on its recent gains over the coming days, underpinned by improved fundamentals.

Pound Sterling (GBP) also remains 0.5% higher against both the US dollar (USD) and the euro (EUR) on the week, and due to the UK currency’s impressive performance over the past month, many currency strategists have revised GBP forecasts.

Western Union UK Currency Strategist, George Vessey, says “GBP/USD could breach the USD 1.40 level this week, whilst GBP/EUR could advance beyond EUR 1.15 if the UK’s vaccine rollout continues to poise the economy for an early reopening.”

After a brief rebound amid some risk-averse trade, the euro (EUR) has resumed its downtrend against pound Sterling (GBP).

The British pound to euro (GBP/EUR) exchange rate rallied to a fresh ten-month best of EUR 1.1497 earlier during the London session and continues to trade near multi-month highs at EUR 1.1492.

However, some market analysts are sceptical about GBP strength following recent comments from Bank of England (BoE) Governor Andrew Bailey over the EU refusing to give London equivalence status and UK businesses reporting a slump in exports to the bloc.

Yet, currency strategists and technical analysts suggest that negative economic growth triggered by post-Brexit trade rules could be offset by expectations for consumer spending boom when UK lockdown restrictions are lifted.

While Brexit headwinds are a critical downside risk for GBP, recent data from the logistics platform, Transporean shows that cargo shipped to France from the UK almost doubled last week, which could be a sign post-Brexit trade tensions are subsiding.

With the effects of Brexit unlikely to become apparent until the second half of the year, near-term vaccine optimism and hopes for the earlier easing of lockdown restrictions should continue to boost GBP/USD and GBP/EUR.

However, as riskier counterparts such as the New Zealand dollar (NZD) and emerging market currencies, including the South African rand (ZAR) are susceptible to risk appetite, these currencies could outperform pound Sterling (GBP) over the coming weeks.

Can GBP/NZD maintain its upward momentum?

The British pound to New Zealand dollar (GBP/NZD) exchange rate trades near four-month highs at NZD 1.9286 and looks set on breaching the NZD 1.93 level.

Pound Sterling (GBP) continues to capitalise on the risk-on mood in foreign exchange (FX) markets, with confirmation that the UK hit its vaccine target providing the GBP/NZD cross an additional boost.

While New Zealand’s economic outlook is brighter than the UK’s, speculation that the Reserve Bank of New Zealand (RBNZ) will tighten monetary policy in the near-future is weighing on the “Kiwi” currency.

HSBC analysts told clients that they forecast the New Zealand dollar (NZD) to rise against risk-off counterparts in 2021, particularly against the US dollar (USD) which is expected to depreciate sharply after the Biden administrations USD 1.9TN stimulus package is passed.

HSBC economists said that New Zealand’s handling of the pandemic should allow the NZ economy to recover ahead of its peers. However, the RBNZ could opt for a more cautious stance following NZ Prime Minister Jacinda Arden’s decision to re-impose lockdown restrictions in Auckland due to a breakout of the UK variant.

That being said, reflation is still the dominant theme in financial markets, with global vaccine rollouts, US stimulus hopes and rising commodity prices supporting the global recovery outlook.

While GBP is the more appealing currency in FX markets at the moment, the New Zealand dollar (NZD) could find bullish momentum over the coming weeks if investors continue to seek riskier assets.

South African rand retreats from one-year highs

The British pound to South African rand (GBP/ZAR) exchange rate tumbled to its worst levels in 2021 during early trade on Tuesday but has pared losses and stormed higher heading into the North American session.

Despite the more risk-on mood in FX markets, GBP/ZAR is trading 1.6% higher at ZAR 20.4244 and looks set on extending its advances.

The South African rand (ZAR) found bullish support last week after global vaccine rollouts accelerated and South African economic data performed stronger-than-expected, with mining and manufacturing figures beating forecasts.

However, the South African rand’s (ZAR) impressive performance has come to a halt on Tuesday, amid some profit-taking ahead of South African Finance Minister Tito Mboweni 2021 budget on February 24th.

While the global economic backdrop supports ZAR, the reality is bleak on the domestic front, and investors appear to be pricing weak fundamentals into South African rand (ZAR) exchange rates.

Although a reasonable budget combined with risk appetite could see ZAR reverse its fortunes, the Rand will likely remain volatile due to South Africa’s mammoth debt burden.