UK Vaccine Push Aids Sentiment towards the Pound

- GBP in strong rally
- Bank of England comments spur gains
- NatWest says GBP can have strong start to 2021

Vaccine rollout

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  • Market rates at publication: GBP/EUR: 1.1207 | GBP/USD: 1.3691
  • Bank transfer rates: 1.0990 | 1.3407
  • Specialist transfer rates: 1.1130 | 1.3594
  • More about bank-beating exchange rates, here

The British Pound has shaken off a poor start to 2021 to rallied strongly over the 24 hours leading into the mid-week session, after the Bank of England Governor indicated it was too soon to cut interest rates again and the vaccine rollout in the UK accelerated.

Sterling is at 1.12 against the Euro and 1.3680 against the U.S. Dollar on Wednesday amidst an improvement in sentiment towards the UK economy as investors look through the current health crisis to a recovery from March onwards.

NHS England announced 121K additional people received their first vaccine on January 10, taking the total of first doses to 2,080,280. The UK aims to get 15 million of the most vulnerable vaccinated by mid-February in order to ease pressure on health services, and investors will be watching the daily tally closely to try and gauge whether this target will be reached.

This puts the UK well ahead of both the EU and U.S. in terms of vaccinations per 100 people, a development which could help Sterling in a world where foreign exchange investors rewards those currencies belonging to countries that exit the health crisis first.

"A successful vaccination programme could differentiate the UK from its peers and provide a bullish GBP bias in the medium to long term," says George Vessey, UK Currency Strategist at Western Union.

UK Vaccination comparison to other countries

"The prospect of a widely distributed vaccine has the potential to upend the narrative around relative growth, as economies the hardest hit by the pandemic benefit the most from proliferation of a vaccine," says Paul Robson, Head of G10 FX Strategy at NatWest Markets. "Some beleaguered global economies may be on the cusp of getting a much needed shot-in-the-arm...literally."

Robson says the UK is one such country, noting it has suffered particularly badly from Covid-19, thereby putting it in the bracket of those countries that stand to benefit from the recovery from the crisis.

Pound advances

Above: Sterling tops the leaderboard on Tuesday.

But how exactly does the vaccine rollout feed into a stronger Pound? The rollout of vaccines will ultimately determine when the UK economy is able to recover, which in turn influences decisions at the Bank of England on interest rates and quantitative easing.

The Pound rallied sharply on Tuesday in the wake of comments made by the Bank of England's Governor Andrew Bailey, that confirmed the Bank Rate would not likely be cut to 0% or below over coming weeks as it was anticipated that an economic recovery was in prospect.

The Pound had fallen in the first week of 2021 after UK leaders introduced stricter lockdown measures to contain the spread of covid-19, leading to expectations for the country to suffer an economic recession.

In turn, money markets raised bets that the Bank of England would respond by potentially cutting interest rates. The aim of lower interest rates is to stimulate lending and the flow of money to the economy, thereby providing a cushion during a difficult time.

The side effect of such measures is however a weaker currency, as Sterling tends to fall when the Bank lowers interest rates.

But, Bailey's comments suggest it is too soon to consider further interest rates cuts, and it appears he is willing to wait and assess the shape of the recovery now that vaccines are being administered before taking such a drastic move as delivering negative interest rates.

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NatWest Markets expect the Bank of England to conclude that the lower bound for the policy rate is above zero and interest rates are therefore set to remain in positive territory.

This is in turn likely to aid further appreciation in Sterling exchange rates.

"So there is scope for the currency to at least start ’21 on the front foot, most clearly against safe haven currencies," says Robson.

Bailey told the Scottish Chambers of Commerce there were "lots of issues" with negative interest rates, the merits of which are being debated by members of the Bank's Monetary Policy Committee.

The Pound will likely benefit should financial markets continue to reduce expectations for an interest rate cut over coming days and weeks.

In addition to Bailey's comments, the Bank's Deputy Governor for Monetary Policy Ben Broadbent said in a speech on Tuesday that if rates were lowered further he would want them to feed through to lower lending rates, but "experience from other countries tells us that retail interest rates are kind of bound at zero," he said.

"Investors scaled back their negative rates bets in the wake of these two speeches, making Sterling the G10 top performer," says Mathias Van der Jeugt, analyst at KBC Markets.

The Pound-to-Euro exchange rate reached a top at 1.1195, which comes in as a notable technical resistance level for the market. The Pound-to-Dollar exchange rate reached a high at 1.3606, ensuring that the medium-term uptrend in Sterling remains intact from a technical perspective.

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