Sterling’s vaccine-fuelled rally starts to look relentless

Sterling’s vaccine-fuelled rally against the euro is beginning to look relentless.

The pound has extended its longest winning streak in five-and-a-half years, rising for a ninth straight day, after the Telegraph reported the UK’s exit from lockdown could be accelerated if data on the effect of vaccines prove better than expected. That’s adding to optimism that the UK will bounce back faster than its European peers.

"The mighty pound is rising like a phoenix," said James Athey, a fund manager at Aberdeen Standard Investors. "The UK economy is heavily domestic- and service-focussed which means it will benefit to a greater degree from reopening," he said, adding that money flowing into the stock market is also a factor, with UK equities among the cheapest in developed markets.

The UK has administered more than 27 doses per 100 people, according to Bloomberg’s tracker. That far outpaces the six doses for the EU and has helped turn the pound into the best performing Group-of-10 currency against the euro this year. Amid the rally, the cost of hedging weakness in the euro over the next three months through options is near its most expensive in nearly a year, a sign that traders are positioned for the further pound strength.

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Banks, meanwhile, are rushing to change their forecasts for the currency pair. BofA Global Research this month revised its year-end target for the euro-pound pair to 0.88, from 0.94. Dankse Bank sees the cross trading at 0.85 in the second half of the year.

The euro fell as much as 0.8 per cent to 85.41 pence on Wednesday, the weakest level in a year. It trimmed its decline to trade 0.2 per cent lower as of mid-morning in London.

"The main driver is building confidence that the UK's world-leading vaccine rollout will allow the UK economy to reopen more quickly than the rest of Europe, " said Lee Hardman, a foreign-exchange strategist at MUFG Bank. "I would say the case for the pound to continue to outperform in the near-term remains compelling."

The pound was boosted at the start of 2021 when Britain avoided a worst-case scenario rupture with the EU, and has been helped by fading expectations that the Bank of England will introduce negative interest rates.

Closing the gap

Yet on the vaccine front there are signs that the EU could be closing the gap. The EU may be able to vaccinate 75 per cent of its adult population by the end of August, about two months earlier than previously forecast, according to London-based research firm Airfinity.

Confidence in the euro remains strong in the further reaches of the options market, with bets in the pair becoming more bullish on longer tenors. The pound is now the most expensive against the currencies of its trading partners since the Brexit referendum in June 2016, according to Bank of England data.

Toronto-Dominion Bank is concerned at the speed of the pound's advance, and European head of foreign-exchange strategy Ned Rumpeltin said the currency looks precarious.

“There is a lot of good news in that price already, so we prefer to keep to the sidelines here for now as we think this one is best left to the very nimble and quick-trigger-fingered,” he said. – Bloomberg