After four hard years, is sterling’s moment in the sun sustainable?
One-way traffic
Much to the delight of Irish exporters to the UK and sterling sellers in general, we have seen one-way traffic as the pound strengthened over the last two months – bar the odd wobble.
Much more than its peers in the currency space, historically sterling does not sit well with uncertainty. So after all the doubt surrounding a possible ‘no-deal’ Brexit scenario, the pound was always going to relish a positive Brexit outcome.
No neg from the Old Lady
The always-vigilant Bank of England (BoE) had been keenly watching the latter parts of the EU/UK Brexit negotiations from the sidelines.
They had also been quite vocal in the fact that they were ready to crack open a fresh round of stimulus in the event of a ‘no deal’ Brexit.
As that risk subsided, so too did the dovish BoE rhetoric.
More crucially for the pound however, the chatter around the BoE introducing negative interest rates as part of any new stimulus plan began to dissipate.
Through January and February, some more senior members of the BoE monetary policy committee (MPC) were at pains to stress that the ominous threat of negative interest rates, while always an option, were not to be part of their mandate in the short to medium term.
Article 16 debacle
No sooner had the EU/UK Brexit acrimony of the previous fifty-four months been put to bed in December, than they were at each other’s throats again.
Just over a month later (January 29), as the world gazed on in envy at what was looking likely to be a hugely impressive UK vaccine rollout programme, a visibly disgruntled and terribly ill-advised EU triggered and (wisely) aborted the highly contentious Northern Ireland article 16 protocol.
In what appears now to have been a fit of jealousy, the EU had sought to use the clause to ensure that Covid-19 vaccines needed export authorisations to the UK before departing EU factories.
It was most definitely not the EU’s finest moment. As a result, the euro was sold off across a basket of currencies to below the £0.88 level for the first time in nine months.
It appears that the EU was right to be envious; that UK vaccine rollout programme has turned out to be the third most successful on the planet – behind Israel and the UAE.
Nearly 28pc of the UK population have been vaccinated in the last ten weeks – 18 million people. The UK government hit its initial target of offering a vaccine to all those in its top four priority groups by February 15. Most EU member have vaccinated between 5pc and 7pc of their populace.
Markets buying into the UK story
On Tuesday, UK Prime Minister Boris Johnson pledged that the UK would be free of all Covid-related restrictions by late June. On the same day, German Chancellor, Angela Merkel, warned that any reopening of the German economy should be weighed up with a serious dose of caution.
These divergent outlooks are the main reason sterling has rallied nearly 7pc to fresh twelve-month highs against the euro (£0.8550).
After four bruising years, sterling is having a moment in the sun. How sustainable will this be? If EU vaccinations catch up – and we feel they will, sooner rather than later – the current weight of importance attached to vaccine rollouts will surely diminish.
As the UK and the EU economies start to emerge from their respective levels of restrictions, the current haze surrounding all things Brexit should also lift.
Where will that leave the pound? A more isolated, medicinally supported UK may not to be in as healthy a state as it currently appears.
The average euro to sterling rate for the last twelve months has been in or around £0.8950. With that in mind we feel that sterling sellers should try to take advantage of attractive technical levels in the £0.83/£0.86 region.
Article 16 debacle was most definitely not EU’s finest hour