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GBP Q2 2021 Fundamental Forecast

GBP Q2 2021 Fundamental Forecast

Nick Cawley, Strategist

Fundamental Analysis: Vaccination Program Provides Real Hope for the Future

The first quarter of 2021 turned out along the lines of our Q1 report. The British Pound rallied towards GBP/USD 1.4200, slightly higher than our expectations, before dropping back to 1.3700. In mirror, EURG/GBP hit a low of 0.8535, just below our 0.8600-0.8800 projected band. Looking ahead to Q2, Sterling should remain better-bid and underpinned at least at current levels, while further upside will likely be more of a struggle, and a longer process, than last quarter’s rally. There are potential roadblocks ahead in Q2 but the British Pound is well positioned to move further ahead even if others want to rein the UK back.

UK Vaccination Program Powering Ahead

The UK has vaccinated nearly 30 million people (as we write) with a first dose, while over 2.5 million people have had two doses of a Covid-19 vaccination. This impressive achievement should translate to a quicker-than-expected re-opening of the UK economy, potentially powering robust economic growth and boosting job prospects. The latest official employment figures will have pleased the government with the unemployment rate falling down to 5%, while the employment rate in the three months to January 2021 was estimated at 75%, marginally lower than the prior quarter. The UK economy is expected to grow by 4.5% this year, according to the latest IMF projections, and this may be upgraded due to the speed and success of the vaccination roll-out along with the substantial fiscal and monetary policies already in place.

While the outlook for the UK economy and Sterling look brighter at the moment, the last EU/UK spat over vaccination doses may slow the UK vaccination plan and weigh on growth. The EU has said that it has the power to block any Covid-19 vaccines leaving the European Union, if manufacturers commitments to the single-block haven’t been met, as the block seeks to increase vaccinations to stem a growing third wave of the virus.

Bank of England (BOE) Unlikely to Change Course

The Bank of England (BoE) is expected to keep all policy settings on hold in Q2 as the economy continues to recover. The recently mooted idea that the UK central bank would cut rates again, and talk of negative rates, has now been priced out by the market. The next move in interest rates is now expected to be higher, but not for some time. Inflation remains well below target of a sustainable 2% and this, along with growth, will be the main focus of the BoE in the months ahead. The yield on the 10-year gilt has risen to levels not seen since the end of 2019 and surged from its mid-pandemic low of 10 basis points to a current level of 78 basis points. Rising yields in part reflect growing economic confidence and, down the line, higher interest rates.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.