Despite some respite for the common currency, investors are still backing the pound according to investment bank MUFG who said expect “further GBP upside”.

MUFG believe the UK’s effective vaccine rollout will lead to a significant bounce in consumer spending, which will succeed the ambitious forecasts made by the Bank of England. The bank anticipates growth of 14.2 per cent between Q2 2021 and Q2 2022 but MUFG believe this could be higher. The pound has rallied since the turn of the year gaining more than 3.5 per cent against the euro, reaching its highest level for 9 months.

The implementation of a Brexit trade deal has avoided the so-called “cliff-edge” and Citi Bank, the world’s largest foreign exchange trader, recently reported an increase in pound sterling flows for longer-term assets, underpinning a level of support in the UK currency. In addition, the odds of a rate cut have been slashed following Bank of England Chair Andrew Bailey’s comments last week, leaving the door open for a rise in the pound to euro exchange rate. The pound has been the best performing G10 currency since the turn of the year and with the UK at the front of the field with its vaccination programme, there are clear reasons to be bullish.

UK Covid Cases Rise

The UK Government has now inoculated around 20% of the population with a first dose of the Covid-19 vaccine. By comparison the EU has managed to administer less than 4%. The UK has vaccinated over 80% of the over 75’s, which is the age bracket responsible for 75% of all Covid deaths within the UK. The number of infections, hospitalisations, and deaths continue to fall rapidly, and this can be partly attributed to the first shots of injection being rolled out to the older population who could’ve otherwise found themselves as casualties of this pandemic.

With the Covid statistics looking increasingly better, there has been pressure from Conservative backbenchers to open schools earlier. At present, the government has noted the 8th of March as the earliest possible return date but there is pressure to bring this forward. Whilst the UK’s Covid position has improved significantly, there are still many questions around how quickly the UK government should relax the lockdown measures.

Political progress in Italy provides the euro with some short-term support

The pound to euro exchange rate remained in slim trading yesterday as the euro received some support in the shape of an improved Italian political situation. Former European Central Bank President Mario Draghi, who recently received a vote of confidence to form a new government from Italian President Sergio Mattarella, received backing from Italy’s two largest parliamentary parties over the weekend. Draghi’s position was given a further boost yesterday when Silvio Berlusconi, who leads the Forza Italia Party confirmed his party’s support too.

As such, investors are now betting that Mario Draghi will be able to form a new government with a parliamentary majority. Mario Draghi is viewed as a safe bet given his pro-European stance and his expected push for a common eurozone budget, which would take the eurozone further towards fiscal consolidation following the EU recovery Fund, which saw the first sign of debt mutualisation.

Pound to US Dollar at 3-Year High

The pound to US dollar yesterday breached 1.3800, which is its highest trading level since April 2018, almost 3 years. The pound is in a strong position for reasons mentioned above and several days of US dollar decline has led to an increase in investors buying US debt, which in turn has pushed yields lower and made the US dollar a less attractive proposition.

It now seems likely that President Joe Biden will manage to pass most of his coronavirus package which will see the need for the issuance of more debt bonds, and with it, a likely weaker US dollar. Citibank see the pound to US dollar trading at 1.45 in six months and targeting 1.47 in 12 months. ING share a similar view on the pound to dollar exchange rate although their forecast is more aggressive with a six-month reading at 1.48 and a 12 month reading at 1.53.

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