British Pound Set To End The Week Lower, But Fundamentally Remain Supportive For A Stronger GBP

The British Pound reached a new 8-month high against the Euro and Dollar but has since retreated and looks softer ahead of the weekend, but analysts say the currency will stay well supported amidst a combination of rising global markets and a strong vaccine rollout in the UK.

The Pound-to-Dollar meanwhile climbed to 1.37452 on Thursday but traded down this Friday at 1.36600.

"Another day, another high for the U.K. pound which touched its strongest since May 2018 against the greenback. Sterling is shining amid fading prospects for Britain to resort to negative interest rates," says Joe Manimbo, Senior Market Analyst at Western Union.

The two fundamental forces driving Sterling trade include:

1) Rising or falling stock markets stock markets: A growing correlation confirms the UK currency is reestablishing a positive correlation with broader risk trends now that Brexit has faded as a prime driver for the currency.

The decline on Friday matches a broader turn lower for global stock markets which traded in the red during the Asian session following a sell-off late in the U.S. session overnight, and Europe looks likely to follow suit.

The Pound could end the week on a down if markets fail to make gains.

2) The UK's rapid vaccine rollout relative to the U.S. and, most notably the EU, should remain a source of support.

"Sterling hits 8-month high against Euro as UK continues to pull ahead in the vaccine race," says John Meyer at brokerage SP Angel. "The UK’s faster rollout of Covid-19 jabs is leading to hopes that the UK will recover at a faster pace once immunity is established."

Should the UK be able to unlock the economy on a more sustainable basis expectations for a rate cut into negative interest rates at the Bank of England will likely be avoided. Interest rates matter for Sterling, and lingering expectations for negative rates have weighed on the currency over recent months.

Should growth and confidence improve owing to vaccinations, expectations for negative rates could recede further and prove supportive to Sterling.

"Trading appears to be boosted by improving GBP sentiment and the currency breached a major technical level against the Euro - 1.1280 - as the UK rolls out vaccines at an impressive rate and the post-Brexit picture is at least clearer," says Joe Tuckey, an analyst for Argentex Group.

It is expected that from this point restrictions can start being eased in a more sustained basis, which would allow for a more enduring economic recovery.

"Sentiment towards the British currency has certainly shifted and the idiosyncratic issue of Brexit is fading for now, although border challenges and a deal on financial services are still unresolved. Nevertheless, speculative traders are adding to their 'net-long GBP' positions which means the market has turned more positive towards sterling’s future valuation," says George Vessey, UK Currency Strategist at Western Union.

"GBP/EUR is on the cusp of a potential breakout higher if it overturns the €1.13 handle with conviction this week. Such a move could drive the currency pair into the €1.14-€1.16 range before quarter-end. EUR/USD remains supported near $1.21 for now but could fall towards $1.19 over the next month if the Euro is talked down by monetary officials," adds Vessey.