Currency strategists at multinational Wall Street giant Goldman Sachs has stated that the underlying momentum in the Pound is robust and is strengthening because of “first mover advantage” with respect to Covid-19 vaccination drive.
The pound’s rally this year has been remarkable with the Pound-Euro and Pound-Dollar breaching 1.16 and 1.41, respectively.
The investment bank further stated in its research report that the vaccination drive and decline in infections will pave way for the country to position itself for a strong economic rebound.
On February 23, the UK recorded 8,489 Covid-19 infections, the lowest so far this year, with one in three adults getting their first dose of vaccine.
As per Goldman Sachs, further short-term momentum in the UK assets could happen through an expansionary budget from Chancellor Rishi Sunak in March.
Notably, following the inking of the EU-UK trade deal last December, the country is now on the radar of investors. The signing of deal has mitigated considerable uncertainty that affected the outlook of the UK assets.
According to Christian Mueller-Glissmann, an economist at Goldman Sachs, the country’s outperformance remains a topic since the beginning of 2021 as the UK’s assets have gained from fading uncertainty after Brexit settlement and also the marked improvement in Covid-19 vaccinations compared with the countries across the Channel.
Another currency analyst at Goldman Sachs, Michael Cahill, has opined that there is slight lag in the pound’s rally after the end of Brexit uncertainty as the trade deal matched with worries about fresh variant of Covid-19 virus and revived lockdowns.
He opined that investors seem to be coming back for the UK assets, with some top rated investment banks reporting a sharp rise in capital inflows in the past few weeks.
Last week, the Bank of America reported that pension funds, real-estate investment trusts, insurance funds, asset managers and other finance houses are purchasing the UK assets. According to the Bank of America Global Research, large institutions caused a never seen demand for the pound based assets in over a decade.
The underlying reason for the increase in demand for the UK assets, which basically keeps the pound stronger, is that the country’s economy can excel other developed countries in the months ahead. The systematic reopening of the economy, following the vaccination drive, is expected to strengthen the pound.
On Monday, the UK’s Prime Minister Boris Johnson disclosed a roadmap for exit from lockdown. The plan indicates that the country would be back to usual by June, assuming that Covid-19 disappears from the country as a response to the vaccination drive.
To begin with, schools are expected to reopen on March 08, with further relaxation of prohibitions by the end of March. Nevertheless, the subsequent relaxation of limitations would happen only on April 12 i.e. five weeks after the first stage of removal of restrictions.
The roadmap intends to move forward with each step of relaxation once in five weeks. That will enable academics to validate the effect of earlier measures. By June 21, the UK is forecast to have no Covid-19 related restrictions, in case modeling proves to be right.
Antonello Guerrera, UK correspondent for Italy’s La Republica, has pointed out that the UK is the only Western country to have an elaborate exit plan. He believes that the country will be back to normal much before others, provided no new variant of the virus topples the plan.
The likelihood of negative interest rates has vastly diminished. The Bank of England has hinted that there is almost negligible chance of a negative interest rate as it would take at least six months for the financial institutions to prepare for such a scenario and vaccination would be over by then. That is also helping the pound to rally against its peers.
Considering the above factors, Cahill forecasts GBP/CHF to hit 1.30 in the months ahead. The analyst believes that the Swiss franc would record the steep decline in comparison to other European currencies as market switches to risk on sentiment.
