February 3 (Wednesday): Pound Sterling falls behind US Dollar and little changed versus the Euro before a Bank of England meeting. This outcome came after UK’s COVID-19 vaccine rollout offered some support on the British pound.
The currency gained broadly last week thanks to the optimism over UK’s successful COVID-19 inoculation program.
Analysts are pinning their hopes on a faster economic recovery than in the European Union, where the vaccine rollout is not as fast.
Pound Sterling Performance
The market participants are all focusing on the Bank of England’s meeting on February 4. The market is set to reveal the findings of a consultation on what negative rates would mean banks’ operations.
Senior FX market analyst at Monex Europe in London, Simon Harvey, said that the quiet day for Pound Sterling was justified by the magnitude of the Bank of England’s meeting.
Pound Sterling was 0.2% higher at 87.98 pence than the Euro at 1547 GMT, which is not far from an eight-month high reached in the previous session against the currency.
Against the US Dollar, the Pound Sterling was down 0.2% at $1.3645, after touching a one-week low versus the greenback on February 4.
With greater sentiment, most economists that Reuters poll said that there is a bit of chance that the Bank of England will move to cut rates below zero in 2021.
UK’s third national lockdown has put the UK economy on course for a sharp contraction in 2021, but services companies have high hopes about recovery. The final version of the IHS Markit or CIPS UK Composite Purchasing Manager’ Index showed.
Jane Foley, the head of FX strategy at Rabobank, said that there are likely to be “pitfalls for the bulls.”
However, there may be an optimistic story about the British pound.
The economic data in the first three months of 2021 and issues surrounding the Northern Ireland border suggest the national lockdown and Brexit will likely cast a shadow for some time on the UK pound.
Matt Hancock, UK’s health secretary, said that attention needs to be directed to any mutations of the coronavirus that have been detected in the past two months.
Meanwhile, the foreign exchange analysts at ING Bank N.V. have upgraded their forecasts for the British pound, adding that the British Pound’s persistent undervaluation should disappear now that a “no-deal” Brexit has been avoided.
The faster pace of the vaccinations in the United Kingdom and the prospect of a better and stronger economy in the second quarter of 2021 are expected to give upside momentum on the currency.
Petr Krpata, Chief EMEA FX and IR Strategist at ING, said: “Sterling is now free to reap the benefits of a faster vaccination rollout in the UK relative to the eurozone. With GBP having suffered persistent Brexit-related undervaluation since 2016, the currency should now start the process of a gradual convergence towards its medium-term fair value.”