Monex: Rally GBP due to rapid roll-out of vaccination program in UK

February 15, 2021

This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

GBP

Sterling’s climb from March’s doldrums continues this week as the pound rallies to its highest level since April 2018 against the dollar this morning. With over 15m people now having received their first vaccination jab, positive vaccine news in the UK has coupled with a general risk-on theme brought about by declining Covid-19 numbers globally to boost sterling even higher against USD and EUR. Over the weekend, CFTC data showed that hedge funds’ increased their bullish bets on the pound to an 11-month high last week as bets on negative rates were trimmed by the Bank of England’s latest policy announcement. While the CFTC tends to be a lagged indicator, it remains a good overall sentiment gauge in markets and it continues to flash green for GBP. Today’s data saw February’s Rightmove house prices index print at 0.5% MoM, up from -0.9% MoM in January, as the UK housing market remains robust throughout lockdown. With Europe the only major financial hub open for business today, FX volatility may drop off towards the latter parts of the day.

EUR

The euro is sitting at the lower part of the G10 basket today as it performs slightly better than the safe haven currencies USD, JPY and CHF following an improvement in risk sentiment, while trading softer against the remainder of the G10 basket. While market mood is improving along with global growth expectations, the eurozone remains a laggard in vaccine rollout compared to the UK and US. Less than 5 doses per 100 people have been given out in the EU compared to 25 and 16 in the UK and US, which may be holding back the euro moderately. As soon as vaccine distributions catch up in the eurozone, the currency should rebound and portfolio inflows should increase. In the meantime, markets focus on this week’s release of the European Central Bank minutes on Thursday. The minutes will likely focus on the ECB’s reaction to euro strength and whether additional policy tools are necessary to address it.

USD

The US dollar is having a rough start of the week, with the DXY index trading around half a percentage point lower than Friday’s highs as stronger economic indicators and rising equities prompted investors to sell haven assets on increased growth expectations. The yield curve continued to steepen, indicating increased inflation expectations into the long end of the market while shorter-term yields remain anchored. The topic of reflation will undoubtedly be addressed during Wednesday’s FOMC meeting minutes as well as further comments on the appropriate timing of tapering back stimulus. Fed Chair Jerome Powell has been clear in his remarks that it is far too early to be discussing any sort of policy normalisation, but markets will carefully scrutinise the minutes to look for guidance on timing. On the data side, January retail sales and industrial production on Wednesday will give currency traders additional cues on the state of the economy.