Pound Sterling pressured by UK’s worsening COVID situation

• UK COVID concerns are weighing on pound Sterling (GBP) exchange rates
• US dollar (USD) support by the risk-off mood in currency markets
• Euro to British pound (EUR/GBP) exchange rate treading water ahead of European Central Bank (ECB) policy announcement
• Australian dollar (AUD) and New Zealand dollar (NZD) could be affected by risk-off/risk-on patterns (RORO)

Pound Sterling (GBP) has extended Tuesday’s declines amid ongoing signs that the UK’s coronavirus situation is deteriorating.

The British pound (GBP) has now declined for five consecutive trading sessions against the euro (EUR) and US dollar (USD). Although the British pound to US dollar (GBP/USD) exchange rate appears to have found some momentum heading into the North American trading session, downside risks still remain.

Foreign exchange (FX) markets have been selling the UK currency due to renewed COVID concerns and an overall dip in global market sentiment, amid fears that the Delta variant will fuel a third wave of the coronavirus.

Risk-on/Risk-off (RORO) patterns have dominated currency markets over the past few weeks, with risk-sensitive and commodity currencies such as the Australian and Canadian dollars bearing the brunt of the fright over the spike in the B.1.617 variant.

The significant shift in risk appetite is also weighing on pound Sterling (GBP) this week, with losses recorded against the US dollar (USD), Japanese yen (JPY), euro (EUR) and Swiss franc (CHF).

GBP has also been rocked by persisting Brexit tensions and concerns over the UK government’s decision to unlock the economy by removing all limitations on social contact and mask-wearing.

UK reopening fears weigh on GBP exchange rates

On July 19th, the British government moved England to step 4 of UK Prime Minister Boris Johnson’s lockdown easing roadmap, meaning night-time entertainment venues were allowed to reopen and rules about social distancing and face coverings ended.

However, the move has sent Britain’s infection rate surging towards January highs, with official data from GOV.uk revealing that 46,558 tested positive for COVID-19 on July 20th, while the 7-day case rate has jumped by nearly 40%.

GBP/USD tumbled to the USD 1.35 level amid signs that Britain’s coronavirus situation was deteriorating – the lowest rate since January 2021.

The ongoing spike in the infection rate has inflamed fears that the UK government could be forced to reimpose coronavirus lockdown measures to curb the exponential rise in COVID cases.

Pound Sterling’s (GBP) upward momentum has been primarily driven by Britain’s impressive coronavirus vaccine programme. The first vaccine doses have been delivered to almost 90% of the adult population, while more than 66% of UK adults are fully vaccinated.

However, GBP’s winning streak appears to have come to a halt this week as the reopening of the UK economy intensified COVID concerns.

In the continued absence of any significant economic indicators in mid-week trade, downside pressure will likely persist into Thursday’s session.

Although confirmation that UK public sector borrowing declined by GBP 5.5BN in June has offered GBP some much-needed respite, the shift in the FX “market music mood” will continue to favour risk-off assets such as the greenback.

A jump in 10-year US Treasury yields has also supported the greenback in mid-week trade, with investors expecting solid economic growth in the United States to result in a more stable expansion post-pandemic.

The risk-off market mood has also seen the British pound to euro (GBP/EUR) exchange rate come under pressure in currency markets.

GBP/EUR treading water amid fears of a looming third COVID wave in the UK

The British pound to euro (GBP/EUR) exchange rate is clinging onto the EUR 1.16 level heading into New York trading hours.

Earlier this week, the currency pair slumped to its lowest level since May 10th, after surging to as high as EUR 1.1758 the previous week.

While the currency pair is trading slightly higher heading into the North American trading session, the wave of risk aversion has reinjected volatility into GBP/EUR.

Although Thursday’s European Central Bank (ECB) meeting could see GBP/EUR reverse its near-term fortunes, five days of successive declines have damaged the currency pair’s technical outlook.

Any sustainable positive momentum will more than likely depend on whether investors can overcome concerns about rising Delta variant cases in Britain.

Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd, noted: “Hopes that COVID vaccine rollouts would end the pandemic are fast fading.

“A return to normality could be much further away than people initially thought, especially if the infection rate issues persist into the winter months, as the virus has been shown to thrive in colder temperatures.”

Although many advanced economies are overlooking rising caseloads in hopes that COVID vaccines will prevent hospitalisations and severe illness, Delta-related anxieties will prove unhelpful to those looking for firmer GBP exchange rates.

Mr Gittler noted that rising inflation and the scaling back of financial support would also make matters worse by creating an “intractable combination of problems.”

Still, investors may be hesitant to push the euro (EUR) further ahead of the European Central Bank’s (ECB) monetary policy meeting.

If ECB President Lagarde strikes a dovish tone, the GBP/EUR exchange rate should edge higher in FX markets.

Still, given that most FX market participants expect the ECB to be dovish, a downbeat assessment of the Eurozone economy could have a minimal impact on the single currency’s movement.

Meanwhile, an unexpectedly hawkish tone from the ECB could increase the euro’s (EUR) appeal and send the British pound to euro (GBP/EUR) exchange rate heading towards 2021 lows.

Albeit continental Europe’s coronavirus situation could limit any upside potential in EUR/GBP. EU member states have reported alarming spikes in the daily infection rate over the past month, which has forced some officials to reimpose pandemic curbs.

However, suppose rising Delta covid variant caseloads feed into broader fears about the global economy. In that case, safe-haven currencies such as the euro (EUR) will more than likely receive a boost in FX markets.

Commodity currencies suffer amid the risk-off market mood

The Australian dollar (AUD) is one of the worst-performing major currencies on Wednesday and is closing in on the bottom spot among the G10 segment for 2021.

However, the Commonwealth Bank of Australia foresees the “Aussie” dollar’s weakness driving the British pound to Australian dollar (GBP/AUD) exchange rate above AUD 1.94 in the coming months.

At the time of writing, GBP/AUD is trading near multi-year highs at AUD 1.863, aided by the risk-off trading environment and concerns over the outlook for the Australian economy following the reintroduction of stringent coronavirus restrictions across the country.

Data from the Australian Bureau of Statistics has also revealed a steeper-than-expected decline in sales value for June, which is weighing heavily on AUD, especially in a market where the US dollar (USD) remains favourable.

A stronger greenback tends to create a supportive environment for the British pound (GBP) against commodity currencies such as the Australian dollar (AUD), Canadian dollar (CAD) and New Zealand dollar (NZD).

Although GBP is navigating a plethora of downside risks, AUD will be more heavily impacted by signs that the global economic outlook is deteriorating.

There is also the risk that the Reserve Bank of Australia (RBA) will not taper its government bond-buying programme in November due to the “Delta lockdown” impact.

The World Health Organisation (WHO) said that the third wave of COVID-19 has already transpired globally and expects 2020’s relatively unscathed countries to suffer greatly.

New Zealand is one of the few countries that successfully tackled COVID-19 early on, with the NZ government seeking to eliminate the virus rather than learn how to live with it.

According to the NZ Ministry of Health, New Zealand has had a total of 2828 cases and 26 deaths – far lower than the UK, where there has been 5,563,006 positive COVID-19 cases and 128,896 deaths.

New Zealand’s strict border policy has also enabled the economy to function near total capacity, which has supported the New Zealand dollar (NZD) in currency markets.

At the time of writing, the British pound to New Zealand dollar (GBP/NZD) exchange rate is trading 0.2% lower at 1.9657.

Although draconian COVID restrictions have created a skills shortage in New Zealand, investors are optimistic about New Zealand’s recovery outlook, courtesy of better-than-expected labour market figures and growth data.

Investors have also raised bets about the Reserve Bank of New Zealand (RBNZ), bringing expectations for an interest rate hike forward due to New Zealand’s success in effectively stamping out COVID-19.

While rising Delta variant caseloads present a potential barrier to tightening policy and raising interest rates, many FX market participants believe the RBNZ could perform a rate hike as early as November 2021.