At the start of this week, the pound has been one of the strongest performing G10 currencies, with cable recovering up above 1.3900 after touching a low of 1.3733 late last week. According to MUFG Bank economists, the UK government supports the pound by learning to live with the COVID-19 strategy.
“The key catalyst for the pound’s early-week outperformance was UK Prime Minister Boris Johnson’s revelation yesterday that the government intends to proceed with the final stage of removing COVID-19 limitations on July 19th, following a four-week delay.”
“Plans to fully reopen the UK economy are expected to result in a significant increase in covid cases, but the government is confident that the NHS will be able to cope better than in previous waves, given that the vaccine rollout is expected to reduce the relative number of severe cases,” according to the government.
“Allowing the UK economy to reopen more fully boosts the pound’s optimistic outlook. As the UK economy continues to strengthen through the rest of the year, we expect EUR/GBP to fall towards the low 0.8000s, and speculation of BoE rate hikes as early as next year grows.”
“The UK government’s ambitious strategy, however, is not without risk. The first potential issue is that a significant increase in hopefully “mild” COVID-19 instances while keeping the legal necessity to self-isolate will cause disruption because more people will be forced to isolate as more cases are encountered. The second, more serious issue will arise if the government’s calculations are incorrect, and strain on the NHS becomes more difficult, necessitating another lockdown in the autumn/winter. If more limitations are needed, it will cause the pound to correct downward.”/n
