Pound-Euro: Sterling Unlikely to See "Sustained Weakness Near-term" Despite Unlocking Delay

- Sunak said to back a delay to lockdown easing
- GBP could see short-term pressures
- But any weakness tipped to be short lived
- GBP/EUR forecast at 1.19 by Rabobank

Image © Gov.uk

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The Pound is being tipped by analysts to ultimately ride through a period of uncertainty linked to the delay of the lifting of full lockdown conditions in England, likely to be announced next week.

The delay would be a response to data showing Covid cases in the UK are now risinng so fast that they will likely reach 'lockdown levels' by the end of June, according to projections.

"Discussions on postponing the grand re-opening due to the Indian variant may weigh on GBP near-term," says Kristoffer Kjær Lomholt, Chief Analyst at Danske Bank. "We doubt it will be a trigger for more sustained GBP weakness near-term".

Further signs that a delay would be announced to the June 21 'freedom day' in England was a report by The Guardian newspaper that Chancellor of the Exchequer Rishi Sunak would be ready to countenance a four-week delay.

Sunak was seen as a potential hurdle to calling a delay amongst Prime Minister Boris Johnson's senior circle of ministers.

The development comes amidst a period of uninspired trade by the UK currency which has struggled to rediscover that upside traction that characterised the first few months of 2021.

Above: GBP/EUR has lost upside impetus since April

Those watching the market should be aware that over coming days the British Pound will be guided by a combination of factors: 1) ongoing uncertainty as to whether the UK will completely open up on June 21, 2) rising concerns over a potential EU-UK trade war and 3) a global financial market place that is treading water as it awaits its next big directional impulse.

With major foreign exchange pairs maintaining tight ranges the potential for a greater focus on the idiosyncratic drivers of a given currency becomes heightened.

For Sterling, attention falls on the rising cases of the Covid-19 variant first discovered in India, now referred to as the Delta variant.

The increased transmissibility of the variant means UK case rates are rising rapidly with calculations suggesting the case load is doubling every ten days.

Rising cases might have a negligible obvious impact on the UK economy in the near-term, but fears of tighter restrictions could have a material impact on consumer and business confidence, which in turn knocks growth.

"Although UK consumer confidence has been upbeat in recent weeks, the rebound is in danger of being hampered either by a delay to the lifting of restrictions or by an increase in Covid cases," says Jane Foley, Senior FX Strategist at Rabobank.

The government has said it awaits further data ahead of a decision - due next week - as to whether or not to go ahead with the June 21 unlocking.

Government wants to know whether the exponential growth seen in cases will lead to an exponential growth in hospital admissions.

Incoming data suggests hospital admissions are starting to rise where cases have risen sharply, giving greater credence to calls for a postponement of the June 21 'freedom day'.

"Latest data now show a clear rise in hospital admissions in the UK, and numbers could climb rapidly," says John Burn-Murdoch a data specialist at the FT. He says admissions and patient numbers in the North West - the epicentre of the latest outbreak - are rising in a straight line on a log-scale which suggests exponential growth.

Above image courtesy of @jburnmurdoch

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"The decision is resting firmly on the evolution of hospital admissions and deaths data, which should gradually complete the picture around how effective the vaccine rollout is at breaking the connection between infections and severe symptoms," says Philip Shaw, Economist at Investec.

Although the data does not look supportive NHS Providers chief executive, Chris Hopson told Times Radio that vaccines have broken the link between infections, hospital admissions and deaths with hospitals were reporting fewer and younger patients.

“What [hospital] chief executives are consistently telling us is that it is a much younger population that is coming in, they are less clinically vulnerable, they are less in need of critical care and therefore they’re seeing what they believe is significantly lower mortality rate which is, you know, borne out by the figures. So it’s not just the numbers of people who are coming in, it’s actually the level of harm and clinical risk," he said.

Foreign exchange analysts have in turn been trying to untangle what a delay to fully reopening the economy would mean for Sterling.

"It’s important not to just focus on the raw numbers here … you also do need to look at who’s being admitted into hospital and how clinically vulnerable and what level of acuity they’ve got,” he added.

"Discussions on postponing the grand re-opening due to the Indian variant may weigh on GBP near-term," says Danske Bank's Lomholt.

The call comes as the Pound-to-Euro exchange rate maintains a tight range located just above the 1.16 level (this translates into an area around 0.86 in Euro-Sterling).

"EUR/GBP had another quiet day yesterday and continues to trade plus/minus 0.86. That said, the cross has moved a bit higher in recent days, probably related due the discussions on whether to postpone the big re-opening on 21 June due to the delta variant," says Lomholt.

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"In Q1 the pound’s outperformance of the EUR was marked. It was led by the UK’s early vaccine programme, by Brexit related relief and by a less dovish tone of the BoE in the February meeting. By contrast, the current quarter has become a tug-o’-war between the two currencies resulting in fairly consolidative activity," says Rabobank's Foley.

Media reports out this week have suggested a delay is likely to be announced as leaking tidbits of information to the press has been a hallmark of the UK government's communication strategy during the pandemic.

What is less certain is whether any looming delay lasts for two weeks or four weeks, presumably the length could have a bearing on the Sterling exchange rate direction.

"Since we are most likely only talking about 2-4 weeks, we doubt it will be a trigger for more sustained GBP weakness near-term," says Lomholt.

Regarding the tight ranges seen in the Pound, Euro and other associated exchange rates, Foley says there is unlikely to be a break anytime soon.

The Euro has been a beneficiary of the region's rapidly improving vaccination programme that has allowed its various states to exit lockdowns.

"(Vaccine) rollouts continue at pace across Europe too, prompting Belgium and France to further relax restrictions today, with the return of indoor dining and extensions to curfews," says Investec's Shaw.

Without the stringent border controls facing the UK the Eurozone could find itself in a better economic position than the UK before long.

Such a development could weigh in favour of Euro gains against the Pound.

"Against a backdrop of optimism with respect to the Eurozone outlook, and the appearance of a few potential headwinds in the UK, outperformance could prove to be tough for the pound in the coming weeks," says Foley.

Nevertheless the broader picture ultimately remains supportive of further gains from the Pound in the second half of 2021.

Rabobank maintains a view that there is scope for the EUR/GBP exchange rate to edge towards 0.84 by the end of the year, this translates into a GBP/EUR exchange rate of 1.19.