Riskier currencies extend gains as global sentiment improves

  • The global COVID vaccine rollout is supporting risk-on currencies
  • Pound Sterling (GBP) forecast to advance against the US dollar (USD)
  • UK, US and Eurozone economic growth upgraded for 2021
  • New coronavirus variants and higher inflation could undermine economic recovery

According to a Financial Times tracker using data compiled by the World Health Organisation (WHO), government data sources and Our World in Data, a total of 1,975,944,693 coronavirus vaccines have been administered across 231 countries worldwide.

With the global COVID-19 vaccine rollout programmes accelerating and priority groups in most advanced economies now wholly or partly vaccinated, investors are becoming more confident about countries economic recovery prospects.

The UK has vaccinated 75% of all the adult population and is on track to offering vaccines to the entire adult population by July-end 2021.

At the time of writing, 65,658,949 COVID vaccines have been deployed across the country, with 94 in every 100 people vaccinated.

The United States also has an impressive coronavirus vaccination programme, with 87 in every 100 people inoculated. According to a New York Times tracker, 41% of the US population is fully vaccinated, while 51% have received at least one dose of a coronavirus vaccine.

While the COVID vaccine rollout in continental Europe has increased in pace, the EU continues to lag behind the UK and the US in doses per 100 people.


Europe expected to have a smaller economic rebound than the UK and the US

As of June 1st, figures from Our World in Data reveal that the European Union has vaccinated 72 per 100 people.

Separate figures from European Centre for Disease Prevention and Control (ECDC) show that 46.2% of EU adults have been administered one dose of a COVID-19 vaccine. In comparison, 22.3% of the adult population is fully vaccinated.

Although the EU’s vaccine programme has managed to close a significant gap in the pace of vaccinations over the past two months, the initial slowness explains why the British pound to euro (GBP/EUR) exchange rate rallied to a high of EUR 1.1803 earlier this year.

However, the improved rollout also justifies the recent uptick in the euro to US dollar (EUR/USD) exchange rate, which gathered pace since early April.

Although US Federal Reserve (Fed) taper talks have seen EUR/USD come under pressure in early June trade, the currency pair has rebounded from 2021 lows of USD 1.17 and is hovering around the USD 1.22 level.

Some foreign exchange (FX) strategists believe EUR/USD will struggle to travel beyond the USD 1.23 level over the coming month, expecting the European Central Bank’s (ECB) June policy meeting to disappoint investors.

Even if the central bank is relatively hawkish, the robust economic rebound in the United States has triggered fears that the US economy may be at risk of overheating, possibly marking the end of a tailwind for riskier currencies by attracting investors to bond markets.

Accommodative policy stances adopted by the Fed and the US government have also fuelled concerns of higher inflation, with riskier assets already flashing signs of caution.

The US economy expanded by 6.4% in Q1 2021, compared to the Eurozone economy, which contracted during the first quarter of 2021 and entered a double-dip recession for the first time in almost a decade.

That said, EU member states are beginning to lift coronavirus restrictions as COVID caseloads decrease, and the vaccine rollout accelerates. As a result, economists are confident that the bloc will experience rapid growth in 2021.

Since the start of 2021, coronavirus vaccination progress has strongly influenced exchange rate direction. However, Enrique Díaz-Álvarez, the Chief Risk Officer at Ebury, believes that now economies are reopening, relative economic performance is becoming more significant than vaccination reports for currency traders.

In an Ebury publication, Mr Díaz-Álvarez wrote, “FX market participants are refocusing on the economic performance and prospects of the UK, US and Eurozone economies, the response of central banks and inflation risks.”

So, with inflationary pressures growing, new COVID mutations emerging and central banks reluctant to tighten stimulus – what does that mean for the US dollar (USD), euro (EUR) and pound sterling (GBP)?

Is a US dollar breakout imminent?

After an initial slump between Q4 2020 and Q1 2021, the USD has recovered some of its losses against a host of its major trading currency partners, including the euro (EUR), Canadian dollar (CAD) and British pound (GBP), albeit the UK currency is attempting to rise to new highs.

In early-2020, investors piled into the greenback as the world essentially shut down to contain the deadly coronavirus. However, the uptrend reversed into the last quarter of the year as risk sentiment improved and economies began easing COVID lockdown restrictions.

Reports of second and third coronavirus waves saw the US Dollar Index advance to its strongest position in half a year during March 2021, with gains also driven by a pick-up in US vaccinations.

America’s progressive vaccination programme allowed the US economy to reopen earlier than other developed nations, fuelling demand for the greenback.

However, the reopening of the US economy also caused a shift in sentiment, which drove investor flows into riskier assets such as pound sterling (GBP), the Australian dollar (AUD) and the New Zealand dollar (NZD).

The US was one of the first countries to begin mass vaccination and currently administers the Moderna and Pfizer/BioNTech COVID jabs to adults.

Although the country has batches of the AstraZeneca shot and the Johnson & Johnson vaccines, both are not in use due to concerns over rare side effects.

While only two vaccines have been authorised, the US government’s efforts to vaccinate quickly has led to a sharp decrease in new cases, hospitalisations and deaths in the country.

According to the Centers for Disease Control and Prevention (CDC), as of June 1st, there were only 9,358 new cases of COVID-19 in the United States – versus seven days earlier, when more than 23,000 daily cases were reported.

Although the United States still has the highest COVID death rate globally and a staggering cases per capita ratio, today, USD is strengthening ahead of a slew of economic data, which could set the tone for the upcoming Fed policy meeting.

Market investors had bet on the greenback declining as the global economy recovers, and this tends to increase flows into riskier assets such as the British pound (GBP). However, growing expectations for a vacuum of crucial US data and positive surprise from the Fed has increased USD appeal.

The US economy remains on course to outperform most other advanced economies in 2021. The Organisation for Economic Cooperation and Development (OECD) upgraded its growth forecast for the US economy to 6.9% last month, up from March’s prediction of 6.5%.

Macroeconomic data out of America has also been surprisingly optimistic in recent weeks, with recovery being driven by a wave of pent-up consumer demand being unleashed.

Economists have said that US President Joe Biden’s USD 1.9TN stimulus programme and other policy measures introduced by the Fed have triggered the consumer spending boom, which should continue to drive demand in the coming months.

While coronavirus easing has happened at a slower rate in Europe, that’s not to say that the euro (EUR) won’t reclaim its losses against the greenback as the world emerges from the pandemic.

Euro to be supported by surging activity in the euro area

Although EUR is nursing losses against USD ahead of the Fed policy meeting later this month, EUR/USD entered a period of recovery in April following a steep sell-off in the early part of 2021.

Downside pressure was triggered by the EU’s vaccine crisis, the third wave of COVID-19 in the bloc, the ECB’s attempts to talk down the single currency and a broadly stronger greenback.

Despite the Brexit chaos, the euro (EUR) also suffered heavy losses against pound Sterling (GBP) in the first four months of the year.

While inflation risks and new COVID strains pose a threat to broader EU economic recovery, EUR has recovered almost all its year-to-date losses against USD in recent weeks, courtesy of the bloc’s accelerating coronavirus vaccine rollout.

For most of May, GBP/EUR was stuck between EUR 1.15 and EUR 1.16, while EUR/USD rebounded from the USD 1.20 level to trade around USD 1.22.

After months of delays due to supply issues and fears over the AstraZeneca vaccine causing rare blood clotting, the vaccination situation in continental Europe has significantly improved.

The bloc is also due to receive approximately 400M COVID vaccine doses in Q2, which should aid plans to accelerate the rollout and inoculate all EU adults by autumn.

While the slower pace of vaccination could delay the EU’s economic rebound, as the number of cases, hospitalisations and deaths are now following a downward trajectory, consumer attitudes are changing, and spending has increased.

After the third wave of COVID-19 caused many of the EU’s member states to extend lockdown restrictions, the European Commission now expects the EU economy to expand by 4.2% in 2021, a significant upgrade from February’s 3.7% forecast.

Despite the long road ahead, the EU Commission believes that demand for EU exports and increased spending activity in high-income countries such as Germany and France will support broader EU recovery and potentially spill over into gains for EUR.

Still, the risks are high and “will remain high, so long as the shadow of the Covid-19 pandemic hangs over the economy,” says the EU Commission.

The British pound (GBP) is also facing downside risks due to the rapidly spreading Indian variant, which could see the UK government delay plans to ease the final round of coronavirus restrictions.

Will the British pound tumble if the June unlocking is delayed?

While the British pound (GBP) is one of the best performing major currencies of 2021, the UK currency’s impressive rally has stalled over the past month, despite positive economic data releases.

Although the British pound to US dollar (GBP/USD) exchange rate is trading near the top end of its YTD trading range, GBP/EUR has struggled to advance to April highs.

Analysts have attributed its weakened performance to the slowdown in the pace of vaccinations and negative Brexit headlines, with the dispute over Northern Ireland protocol and figures revealing a slump in exports proving to be damaging.

Although the UK has one of the highest doses per capita globally and is on course to offer at least one dose of a coronavirus vaccine to the entire adult population by July-end, the threat of the Indian variant is undermining upside potential in GBP.

The UK’s recovery outlook remains constructive, but warnings about the country being in the early stages of a third COVID wave has caused some financial market jitters.

Despite a significant pick-up in economic activity – with data from the Office for National Statistics (ONS) showing that UK retail sales soared by 9.2% in April and that annual house price growth surged at the fastest pace since 2007 in March – investors are cautious.

Health experts and scientists are urging the UK government to delay the June 21st reopening date until a thorough assessment of the effectiveness of vaccines against the Indian variant has been completed.

UK Prime Minister Boris Johnson has hinted that so far, there is nothing to suggest that the June 21st reopening date needs to be delayed, but ministers are not expected to make an official announcement on June 14th.

Pound Sterling (GBP) shed some of its value at the start of June, which some analysts have said is due to growing concerns over plans for the final unlocking of the economy being delayed.

However, some analysts have commented that a delay to the final lifting of coronavirus restrictions will likely have a limited impact on the UK currency, highlighting that GBP remains constructive against a host of its major trading rivals.

That said, GBP bulls may also be disappointed by the Bank of England’s (BoE) reluctance to tighten stimulus measures despite the UK’s improved economic backdrop.

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