Sterling gets a boost from vaccinations and moves to ease lockdown measures

London

VACCINATIONS and steady moves by the United Kingdom government to relax the lockdown measures in the coming weeks have boosted the sterling.

Data from the Commodity Futures Trading Commission indicated that the majority of currency speculators had short positions in sterling last September and October. In the subsequent months, the sterling bears have been trapped.

In November, after the Pfizer-BionTech and Oxford-AstraZeneca Covid-19 vaccines were approved, the pound has soared by 13.2 per cent against the US dollar, by 10 per cent against the yen and by 6.1 per cent and 5.5 per cent against the Singapore dollar and euro respectively.

Almost 18 million people - or around 28 per cent of the UK's population - have already gotten their jabs, and a confident Conservative government projects that the vaccine rollout will be complete by the middle of the summer.

The latest data indicates that both vaccines are proving effective. Infection rates, hospital admissions and death rates are at last beginning to fall. There is also a surplus of supplies that the government intends to send to poorer nations later in the year.

Instead of relaxing lockdown measures in a swift manner, Prime Minister Boris Johnson and his medical and scientific advisers have decided on a step-by-step approach.

He also intends to use his presidency of the G-7 to press for an agreement on international vaccine passports.

The question is where does the sterling go from here as its US dollar rate of 1.413, after hitting 1.425 at one point, is now within touching distance of 3 per cent below pre-2016 Brexit referendum levels. It is also 23 per cent higher than the levels seen in March 2020 when the pandemic was taking flight.

Steven Barrow, currency analyst of Standard Bank, predicts that the pound will rise to 1.49 in six months and reach 1.57 against the US dollar a year from now. He said the sterling needs to "correct its undervaluation relative to the dollar and other currencies".

Bank of England chief economist Andy Haldane contends that enormous amounts of pent-up financial energy is "waiting to be released".

The coiled spring relates to potential individual savings of over £250 billion (S$467 billion), or 20 per cent of annual household spending, by the end of June, he estimated.

If households spent a quarter of their savings, this would boost growth by more than an extra £50 billion or around 2.5 per cent of gross domestic product (GDP), Mr Haldane said.

Also, a significant number of companies have amassed a war chest of cash, currently running at around £100 billion. Since consumer demand is set to rise rapidly, the conditions are in place for businesses to splash some of their cash on investments too, according to Mr Haldane.

The UK has a sizeable twin budget and current account deficit. The Institute of International Finance estimates that the UK's government debt reached 133.1 per cent of the country's GDP at the end of 2020.

HSBC foreign exchange analysts contend that the pound "is vulnerable to a pull-back" to 1.34 against the US dollar by the end of 2021. "We continue to see a relatively slow path to recovery for the economy. This should keep monetary policy very loose, which will weigh on the pound," they said.