Pound Sterling mixed on virus optimism and Brexit headwinds

• Pound Sterling (GBP) exchange rates forecast to rise due to the UK’s rapid COVID-19 vaccine rollout
• British pound to US dollar (GBP/USD) exchange rate hits best levels since April 2018
• Pound Sterling (GBP) under pressure against the euro (EUR), Norwegian krone (NOK) and South African rand (ZAR)
• Unresolved Brexit issues limiting the British pound’s (GBP) potential to gain

Pound Sterling (GBP) is forecast to extend its bullish run in 2021 due to the UK’s world-leading vaccination campaign and signs that Britain’s reduced its accumulation of foreign exchange reserves.

After four years of heightened volatility due to Brexit, the British pound (GBP) has entered 2021 as the best performing G10 currency, closing in on three-year highs against the US dollar (USD) and rallying to an eight-month best against the euro (EUR).

Besides the UK’s rapid vaccine rollout, upside in GBP has also been triggered by the UK and the EU securing a Brexit trade deal and fading expectations that the Bank of England (BoE) will implement negative rates.

Despite a no-deal Brexit threat being eliminated and signs that Britain’s lead in the vaccine race could unlock the UK economy faster than its peers, pound Sterling (GBP) exchange rates are trading on a softer note today.

However, MUFG’s Head of European Research, Derek Halpenny, said: “The markets may be underestimating the scale of improvement that appears around the corner that will notably lift investor confidence.”

GBP/USD forecast to reach USD 1.40

Although pound Sterling (GBP) is trading in mixed fashion on Tuesday, the UK currency has maintained its bullish bias against the US dollar (USD), primarily due to virus optimism.

As of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.3% higher at USD 1.3792, near three-year highs and could extend its advances if the UK hits its vaccination target.

More than 12.3 million people in the UK have been vaccinated, approximately 18% of the country’s population, which puts Britain in good stead to reach its goal of inoculating 15 million people by February 15th.

Given that the UK is vaccinating faster than the EU and the US, analysts are generally constructive on pound Sterling’s (GBP) outlook.

The increased likelihood of the Biden administration passing the proposed USD 1.9TN stimulus package is also boosting GBP prospects, as this could reinforce the US dollar’s (USD) downtrend.

That being said, pound Sterling (GBP) has to navigate renewed Brexit uncertainty following reports that exports to the EU have decreased by 68% and unresolved tensions over Northern Ireland protocol rise.

While the euro (EUR) is being weighed down by vaccine chaos and Eurozone political rife, the single currency has made tentative gains on Tuesday amid US dollar (USD) weakness.

Euro edges higher amid US dollar weakness

The British pound (GBP) has been broadly appealing over the past month, with investors buying the currency amid expectations that the UK will bounce back from the coronavirus-induced recession in Q2 2021 .

However, GBP has slipped today due to renewed concerns over the coronavirus pandemic, more specifically, reports that current vaccines may be ineffective against COVID-19 mutations such as the South African variant.

According to a recent study, the AstraZeneca/Oxford vaccine only offers 10% protection against the South African strain.

AstraZeneca attempted to reassure the public, stating that their vaccine is effective against the original variant and offers protection against mild cases of the South African variant. Still, the statement did little to boost investor confidence.

It has also been confirmed that the more contagious Kent variant has been identified in Manchester, which could be adding to downward pressure on the British pound to euro (GBP/EUR) currency pair.

The British pound to euro (GBP/EUR) exchange rate has recovered from today’s low of EUR 1.1366 and is trading at EUR 1.1403 heading into the North American session.

However, any sustainable upside GBP exchange rates will likely depend on positive developments concerning vaccine efficacy or signs of UK lockdown restrictions easing.

GBP/NOK exchange rate under pressure

We’ve seen mixed movement in the British pound to Norwegian krone (GBP/NOK) exchange rate recently, with rising oil prices and the UK’s successful vaccination campaign being cited as the reason for fluctuating prices.

At the time of writing, the British pound to Norwegian krone (GBP/NOK) currency pair is trading flat at NOK 11.6881 and remains under pressure due to coronavirus vaccine uncertainty and Brexit tensions.

Last week, GBP/NOK found support after the BoE dismissed the possibility of negative interest rates for the next six months.

However, news that the UK could be tightening border controls to prevent the spread of new COVID mutations and tensions following the EU’s threat to invoke Article 16 of the Brexit agreement has reduced the appeal of GBP.

Meanwhile, the Norwegian krone (NOK) is being boosted by improved risk sentiment, rising oil prices and notably strong economic data out from Norway.

Although the GBP/NOK cross has attempted to stage a recovery, gains may be short-lived as investors anticipate negative UK Q4 growth data on Friday.

Norway will also be releasing Q4 gross domestic product (GDP) data at the end of the week. If the Norwegian economy expanded in the last three months of the year, and the UK economy shrunk, GBP/NOK could come under significant pressure in currency markets.

GBP traders will also be monitoring other economic indicators during Friday’s session, with manufacturing and industrial production data due to be published. If these disappoint, pound Sterling (GBP) could underperform across the board.

GBP/ZAR depreciates ahead of UK GDP data release

The British pound to South African rand (GBP/ZAR) exchange rate has tumbled to ZAR 20.3803 heading into the New York trading hours.

ZAR gains appear to come off the back of South African President Cyril Ramaphosa’s decision to begin easing lockdown restrictions and confirmation that coronavirus vaccines are being administered across the country.

With lockdown measures being lifted in South Africa, investors hope that economic recovery will begin to get underway.

While the UK’s vaccination campaign continues to showcase its success, pound Sterling’s (GBP) overall fundamentals remain weak, limiting the currency’s potential to gain.

That being said, GBP/ZAR weakness could be short-lived given that leading economists have forecast the UK economy to make a sharp rebound in Q2 2021.

Chancellor Rishi Sunak will also unveil his spending budget in March, which could reignite confidence in the UK’s recovery outlook if his plans give new strength to the economy.