Pound Sterling surges as global markets cheer Biden policies

• British pound (GBP) outperforming US dollar (USD), euro (EUR) and Japanese yen (JPY) due to US stimulus promises
• Canadian dollar (CAD) struggles after Joe Biden revokes huge oil deal
• Pound Sterling (GBP) outlook supported by global market sentiment and COVID vaccine optimism
• Eurozone continues to grapple with coronavirus headwinds

Global markets have surged on Thursday in anticipation of US President Joe Biden’s massive USD 1.9TN US stimulus package being passed by Congress, given that the Democrats control the Senate, House of Representatives and the White House.

Stocks, commodities and other risk assets are soaring today as foreign exchange (FX) market participants are confident that the new stimulus package will help drive global economic recovery.

With concerns over Brexit-related saga fading, the British pound (GBP) has been displaying an increasingly positive alignment with risk sentiment, rallying alongside a strong performance in global markets and depreciating when stocks head lower.

Pound Sterling (GBP) rallied to a fresh 32-week high against the US dollar (USD) on Thursday and a seven-month high against the euro (EUR) earlier during the trading session.

Although the GBP/EUR and GBP/USD pairs have softened during midday trade, further gains are likely amid ongoing Coronavirus vaccine optimism and US stimulus promises made by the Biden administration.

At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading at EUR 1.1285, and the EU’s laggard vaccine rollout could drive the currency pair higher in the coming days and weeks.

Pound Sterling (GBP) has also rallied against the safe-haven Japanese yen (JPY), with the British pound to Japanese yen (GBP/JPY) currency pair 0.2% higher at JPY 141.9015.

Meanwhile, the British pound to US dollar (GBP/USD) exchange rate is trading 0.4% higher at USD 1.3728, albeit Cable surged to USD 1.3745 earlier today.

US stimulus hopes have dragged the safe-haven greenback lower against a host of its major trading rivals on Thursday, particularly commodity and emerging market currencies such as the British pound (GBP), Australian dollar (AUD) and South African rand (ZAR).

However, the commodity-linked Canadian dollar (CAD) has failed to capitalise on the risk-on momentum. CAD/USD is trading marginally higher despite signs of strong price growth in oil markets.

Canadian dollar depressed in currency markets

The Canadian dollar (CAD) rallied on Wednesday after the Bank of Canada (BoC) said it would leave interest rates unchanged at its latest monetary policy meeting.

While the “Loonie” is likely to outperform as the greenback weakens, the currency appears to be in a state of limbo against the US dollar (USD) today as the USD/CAD currency pair has been trading sideways.

FX markets appear to be pricing in Joe Biden’s order to revoke the Keystone XL pipeline permit, which would pump oil from Canada into the US.

The move, which will deliver a significant blow to Canada’s energy sector, and in turn, the Canadian dollar (CAD) has dragged the currency lower on Thursday, overshadowing the BoC’s relatively hawkish comments on the outlook for the Canadian economy.

The British pound to Canadian dollar (GBP/CAD) exchange rate has also jumped up by 0.3% on Thursday to CAD 1.7307, with the UK’s lead in the vaccination race also being cited as a driver for upward momentum.

Pound Sterling supported by vaccine optimism

Although global market optimism has been turbocharged by US stimulus promises, with Biden’s USD 1.9TN package expected to underpin global economic growth, risk sentiment is also being boosted by COVID-19 vaccine rollouts.

The British pound (GBP) has benefitted dramatically from vaccine optimism as the UK has now administered more than 5million doses of either the Oxford/AstraZeneca jab or the Pfizer/BioNTech vaccine.

According to official statistics, the UK inoculated 346,922 people in the UK in the 24 hours leading to Wednesday afternoon. With projections showing that approximately 350,000 people need to be vaccinated a day for the UK to achieve its 15K target by mid-February, Wednesday’s figures are reason to be optimistic.

Investors suspect that once Britain inoculates its four priority groups, UK Prime Minister Boris Johnson will lift lockdown restrictions on a more permanent basis, which would allow the UK economy to endure a more sustained recovery.

The UK is also rolling out vaccines at a far more accelerated pace than the Eurozone, which is pulling pound Sterling (GBP) higher against the euro (EUR). If risk sentiment remains intact, GBP/EUR could ignite a bullish reversal pattern and begin trading with an upside bias.

Analysts have also noted that pound Sterling’s (GBP) stronger correlation to global market sentiment could signal an evolution in GBP drivers, meaning the currency could surge as the world turns its back on the pandemic.

While GBP/EUR gains are primarily attributed to weakness in the single currency, a stronger euro (EUR) limits the European Central Bank’s (ECB) power to provide monetary support.

FX market participants are expecting the ECB to leave its policy settings unchanged. However, as Eurozone continues to grapple with the virus, it’s possible that ECB President, Christine Lagarde will issue a warning about the euro’s (EUR) strength to give policymakers scope to implement more aggressive measures if necessary.

GBP traders will also be focusing on the upcoming Bank of England (BoE) monetary policy meeting on February 4th.

Although BoE Governor Andrew Bailey recently dismissed negative rate speculation, the UK’s third national lockdown is expected to produce disappointing economic data that could cause policymakers to reconsider.

That being said, COVID vaccine optimism could limit any meaningful declines in the GBP/EUR currency pair as riskier currencies like pound Sterling (GBP) are more likely to benefit from broader signs of global economic recovery.