Vaccine to Provide Pound Sterling some Protection against Euro Gains says Goldman Sachs
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The British Pound has fallen sharply at the start of the new week on fears the EU and UK would fail to strike a post-Brexit trade agreement, but analysts at Goldman Sachs say the UK's strong position on covid-19 vaccination could underpin the Pound going forward.
In a weekly briefing to clients, the investment bank acknowledges Brexit negotiations are in a "difficult phase" where, "back-and-forth on the specifics once again puts the focus on the abstract—e.g. what percentage of fishing rights is consistent with taking back control."
The Pound fell sharply at the start of the new week amidst reports the UK was ready to walk away from talks within hours and that the EU's Chief Negotiator delivered a downbeat briefing on the status of negotiations to EU ambassadors on Monday morning.
"A deal could come together in the coming days if political interventions are successful. But, this is still a political “choreography” and the timing is important—it might take a little more brinksmanship to make compromise palatable," says Zach Pandl, a foreign exchange analyst at Goldman Sachs in New York.
Amidst rising fears that the UK and EU would fail to strike an accord, the Pound-to-Euro exchange rate fell over a percent to reach 1.0967, the Pound-to-Dollar exchange rate fell back to 1.3266, 1.10% down on where it started the week, meaning that the majority of banks will now be offering rates below 1.30 for international money transfers.
Above: GPBP/EUR at start of new week
- GBP/EUR spot rate at time of publication: 1.0950
- Bank transfer rate (indicative guide): 1.0670-1.0740
- FX specialist providers (indicative guide): 1.0875
- More information on FX specialist rates here
"Sterling risks to Brexit no-deal endgames were exposed this morning as the chatter was less optimistic than many of us thought it would be, with reports in one paper indicating Boris Johnson is ready to walk away within hours. Moreover, confusion over progress on fishing has clearly unnerved the market. GBPUSD slipped from 1.34 overnight to 1.3280 in early trade, a chunky move to start the session and reflective of both the pound’s sensitivity to headlines and the severe downside risks from a no-deal Brexit," says Neil Wilson, Chief Market Analyst at Markets.com.
Goldman Sachs say anxieties around reaching a deal will be disruptive in the short-run, but they think investors should also keep in mind that, "while Brexit impacts will take years to play out, the UK economy is relatively well-positioned to benefit from a vaccine-driven normalisation next year".
The UK will start administering the vaccine to vulnerable patients and key workers on Tuesday, as the first doses of the Pfizer/BioNtech vaccine were distributed to hospitals on Sunday and Monday.
In England, 50 hospitals have been initially chosen to serve as hubs for administering the vaccine.
Scotland, Wales, and Northern Ireland will also begin their vaccination programmes from hospitals on Tuesday.
Goldman Sachs economists reiterated their above-consensus forecasts for the UK next year on the grounds that UK activity has been particularly hard hit by mitigation measures and thus stands to rebound by more, and the UK is very well-placed among its peers for quick and widespread vaccine distribution.
In this context, Goldman Sachs think investors should stay "long Sterling" - i.e. be positioned for upside - "even if the Brexit negotiations do not come to a conclusion this week," says Pandl.
Goldman Sachs are buyers of the Pound against the Euro and target an exchange rate of 1.15.