Pound Reaches Three-Year High Thanks to Economic Optimism

Traders are betting on the success of the UK’s economic recovery thanks to the coronavirus vaccine rollout. In a press release, the government recently announced that its COVID-19 inoculation program is set to hit “more major milestones” as it approves the use of additional jabs.

According to the statement, “more than 13,000 lives have been saved so far thanks to the vaccines.” The UK is “on track to offer the vaccine to all adults by the end of July.”

Toshiya Yamauchi, Ueda Harlow Ltd.’s chief manager for forex margin trading in Tokyo, pointed out that “the pound is favoured because the progress of vaccination puts the UK closer to economic normalization than other countries.” Concluding with, “sterling could climb toward $1.45.”  

The British pound climbed above its previous February high, extending its 2021 gains to 4.2%. The GBP increased by 0.2% to $1.4240 – this is the highest it’s been since April 2018 – before retreating again today.

Positive Outlook

The positive outlook on the UK’s economic growth is fuelling speculation that the Bank of England might start to raise interest rates next year. According to data analysed by Bloomberg, overnight-indexed swaps indicate a 46% possibility that the central bank will raise its benchmark rate by August 2022.

Strategist Alvin T. Tan, who works at RBC Capital Markets in Hong Kong, said that “The UK’s economic recovery and associated growing expectations about the Bank of England ending asset purchases and hiking eventually are driving bullish pound bets.”

All-Round Optimism

Workers are beginning to return to offices across the UK, especially in the City of London. Usage of the London underground is the highest it’s been since the start of the coronavirus crisis. This is another sign that rising vaccination rates and the easing of lockdowns is encouraging people to go back to the office.

TFL (Transport for London) recorded a total of 258,481 taps on May 20^th into the 15 stations that surround the city’s main business district. The analysis included stops like Bank, Monument, and Canary Wharf. The number of people tapping into the tube overtakes the previous pandemic-era peak on November 4^th last year – the day before the nation entered its second lockdown.

In addition to this, according to a survey, UK businesses are feeling upbeat about the economy’s recovery. This is thanks to the further easing of restrictions in May, unleashing pent-up consumer demand.

The Lloyds Bank Business Barometer’s optimism measure increased by five percentage points this month, reaching a level not seen since before the Brexit referendum. The gauge is a monthly survey of UK businesses and is designed to indicate performance and economic expectations.

Senior economist at Lloyds Bank Commercial Banking, Hann-Ju Ho, said that the positive outlook of businesses is particularly encouraging. He added that while it’s an “encouraging sign that firms are emerging from the COVID-19 crisis with renewed resilience and vigour”, we still need to wait and see how the upcoming months unfold.

Fear of a Third Wave

The currency’s ascent reflects the UK’s efforts to contain the COVID-19 pandemic, with authorities looking to reopen the economy fully on June 21^st. This would mean the removal of all current restrictions, including how many people can gather indoors.

However, scientists are advising that this may be premature as there are signs the UK might potentially be heading into a third wave of coronavirus infections. Member of the New and Emerging Respiratory Virus Threats Advisory Group (Nervtag), Professor Ravi Gupta, said that lifting restrictions in June should be postponed “by a few weeks whilst we gather more intelligence”. He stated that although new cases are relatively low, the Indian variant has fuelled “exponential growth”.

Yesterday, the UK reported more than 3,000 new COVID-19 infections for the sixth day in a row. The cases hadn’t exceeded that amount since April 12^th.

At the moment, Prime Minister Boris Johnson is taking an opposing stance on the matter. Johnson believes that there is no conclusive reason to delay the easing of lockdown.

To Sum Up

Thanks to the UK’s successful vaccine rollout, restrictions are being eased, and reopening sectors are benefitting from pent-up consumer demand. These factors put the UK on track for its strongest economic growth in decades.

On the other hand, concerns over a third wave of coronavirus are looming. Former Government Chief Scientific Adviser Sir Mark Walport described this as a “perilous moment” for the UK. It remains to be seen which way the pound will go if the June 21^st reopening is postponed.

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