The Pound Is on a Winning Streak After the U.K. Ramps Up Covid Vaccinations
(Bloomberg) -- The pound is winning back the hearts and minds of investors as the U.K.’s success in distributing coronavirus vaccinations boosts the chances of an economic rebound.
Analysts see the currency ending the year up 2% at $1.40, having lifted predictions from $1.36 just a few weeks ago, according a Bloomberg survey. Fund managers Jupiter Asset Management and Arbuthnot Latham are among those betting on further gains after sterling’s best monthly streak since 2012.
Confidence is building as the country’s vaccine rollout outpaces the U.S. and Europe, with about nine million people inoculated so far. Money markets have pushed back bets for a Bank of England interest-rate cut to next year, even with policy makers set to publish the responses to a consultation on negative rates on Thursday.
“We’ve got the BOE providing monetary support, the British government providing fiscal support and we don’t think we’re going into negative interest rates,” said Gregory Perdon, the co-chief investment officer at London-based private bank Arbuthnot Latham, which is adding bets on the pound against the euro.
Sterling is now leading Group-of-10 currencies against both the euro and the dollar this year. That’s a sharp turnaround from early in 2021 when the pound led declines among peers, as optimism about a Brexit trade deal gave way to concerns about the City of London and the wider health of the economy.
Those anxieties are fading in the wake of the U.K.’s vaccination program. As of Monday the U.K. had inoculated 15 people in a hundred, compared with 10 in the U.S. and just three in the EU. Add to that a government opening up spending after a decade of austerity, and speculation over a extension of its salary support to furloughed workers, and the pound is looking like a better bet.
Plenty of investors see even bigger gains than the market consensus. Jupiter Asset Management, which oversees 55.7 billion pounds ($76.2 billion), has a long position as it predicts a surge of 6% to $1.45, while it’s also looking to bet on sterling gaining about 4% against the euro this year, according to Mark Nash, its head of fixed-income alternatives.
“Things are improving -- the U.K. was hit the most so it has more room to bounce back,” London-based Nash said. “I don’t think there will be fiscal tightening for a long time.”
Arbuthnot Latham sees the euro sliding a hefty 20% to 70 pence by year-end, Perdon said. That’s a level also eyed by Aberdeen Standard Investments and not seen since before the 2016 Brexit vote.
BOE in Focus
Banks are also turning more bullish. MUFG is targeting gains to $1.4125 while Nomura International Plc expects a fast climb to $1.42 by the end of March. NatWest Markets Plc sees sterling outperformance as a “top conviction view,” and ING Groep NV just upgraded its year-end forecast against the euro to 85 pence, from 88 pence.
“With the risk of a ‘no deal’ Brexit no longer hanging over markets, the persistent pound undervaluation of recent years should begin to dissipate,” strategists including Petr Krpata said in a client note.
Yet not everyone is changing their position, given caution over the U.K.’s high death toll and questions about its new relationship with the European Union. John Roe, head of multi-asset funds at Legal & General Investment Management, is already long on sterling against the euro and the dollar but isn’t increasing his bets.
A key risk factor is the BOE further cutting borrowing costs from 0.1%, after policy makers raised the possibility of sub-zero rates in recent months. Any signs in favor in Thursday’s policy statement could spook markets, though most analysts think the BOE will avoid taking this controversial step.
Options traders are largely ruling out a surprise over the coming week, with the cost of hedging swings in the currency close to its lowest since mid-2020.
“There’s short-term risk of dovish guidance or even some Monetary Policy Committee members voting for a rate cut,” said Nomura foreign-exchange strategist Jordan Rochester. “But the base case is that once we get past mid-February, the U.K. should start to outperform again, as the BOE avoids negative rates and the U.K. looks to reopen the economy.”
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