Goldman Sachs says Pound Sterling has "First Mover Advantage", Hits fresh Highs against Both Euro and Dollar

- GBP/USD reaches 1.4164
- GBP/EUR reaches 1.1656
- Goldman Sachs says GBP/CHF can hit 1.30

FILE PHOTO - A view of the Goldman Sachs stall on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid/File Photo

The momentum behind the British Pound is strong and foreign exchange strategists at Goldman Sachs says the UK currency is presently benefiting from a "first mover advantage" in the global vaccine rollout.

Sterling's 2021 advance extends into the midweek session, with the Pound-to-Euro passing 1.16 and the Pound-to-Dollar going past 1.41.

The Wall Street investment bank says in a research note out this week the vaccine roll-out and the decrease in infection rates in the UK means the UK is well positioned for a near-term rebound.

The UK recorded its lowest daily infections of the year at 8,489 on February 23 and one in three adults had received a first dose of a covid-19 vaccine as of Tuesday.

Additional near-term momentum in UK assets could also come in the form of an expansionary March budget from Chancellor Rishi Sunak says Goldman Sachs.

The UK has also found favour amongst investors since the signing of the EU-UK trade deal in December 2020, which has lifted some of the uncertainty that marred the outlook for UK assets in general.

"The UK outperformance has been a theme since the start of the year as UK assets have benefited from falling uncertainty following the Brexit resolution as well as the very good progress on COVID-19 vaccinations especially vs. the rest of Europe," says Christian Mueller-Glissmann, an economist at Goldman Sachs.

• Market rates at publication: GBP/EUR: 1.1656 | GBP/USD: 1.4164
• Bank transfer rates: 1.1430 | 1.3867
• Specialist transfer rates: 1.1574 | 1.4065
• More about bank-beating exchange rates, here

Mueller-Glissmann's colleague, Michael Cahill, a foreign exchange strategist, says of Sterling's gains:

"We are likely observing some lagged follow through from the clearing of Brexit uncertainty, since the trade agreement coincided with concerns over the new Covid variant and renewed lockdowns".

Investors appear to be returning to UK assets in the post-Brexit period with some investment banks reporting a sizeable increase in incoming capital flows over recent weeks.

Bank of America last week reported the "strongest real money GBP buying ever". Real money buyers include pension funds, insurance funds, real estate investment trusts, asset managers and other finance houses.

These firms were collectively responsible for the strongest demand for Pound Sterling-based assets ever seen by Bank of America Global Research in nearly a decade of monitoring such flows.

Whetting investor appetite for UK assets - which invariably drives fundamental demand for Sterling - is the view that the UK economy can outperform its peers in coming months, thanks to a predicted sustained reopening of the economy courtesy of the country's vaccination programme.

The Pound is enjoying a "first mover advantage," says Cahill.

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The British Pound advanced against a number of major currencies and kept alive its 2021 uptrend after the Prime Minister Boris Johnson on Monday revealed a roadmap out of lockdown that could see the country back to normal by mid-year, provided the covid-19 pandemic is quashed by the country's vaccination programme.

In a statement to Parliament Johnson said the reopening of the economy would commence with the return of schools on March 08, with a further easing of restrictions at the end of March.

However, the next major easing of restrictions would only occur on April 12, five weeks following the initial March 08 opening.

The roadmap envisages a new phase of reopening every five weeks, allowing scientists the opportunity to assess the impact of the previous measures.

June 21 should see all restrictions removed, if modelling is correct.

"No other country in the West has a clear, detailed exit strategy from the Covid nightmare as the UK," says Antonello Guerrera, UK correspondent for Italy's La Republica. "There gonna be bumps of course. But, unless variants & Co ruin the plans and despite the supposed “slowness”, the UK is poised to be back to “normality” much earlier than others."

But, Cahill says the Pound's outperformance is not merely a story of vaccinations and the associated expectation for a sustained economic reboot.

"Sterling has been outperforming of late, and while vaccinations are probably helping boost the optimistic narrative—about 25% of the population has received at least the first dose—we are doubtful this is the only driver," says Cahill.

"Indeed, FX markets are forward-looking, so reaching herd immunity a few months earlier than its peers should have a relatively modest impact on the currency," he adds.

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So what are the other ingredients in the secret sauce?

Firstly the issue of clearing Brexit fog is identified by Cahill, as detailed earlier in this article. Another is the composition of the UK economy which is particularly exposed to the high-contact service sector.

The closing of this sector meant the UK suffered one of the worst declines in economic activity in the developed world owing to covid-related lockdowns. The rebound should therefore also be outsized.

Cahill says it "should bounce back strongly in coming quarters when excess savings are unleashed".

The Bank of England is another factor.

"The BoE’s finding that negative rates are not feasible at the moment has helped clear some of the policy headwinds," says Cahill.

The Pound rose on February 04 after the Bank said it was unlikely to cut interest rates for at least six months as commercial banks required time to prepare for such an eventuality.

But in six months the Bank's economists forecast the economy to be in the grip of a notable rebound, negating the need for a cut anyway.

As such, investors rapidly exited positions consistent with lower rates in the future, aiding the Pound.

"Taking these factors together, we maintain our recommendation to go long GBP/CHF with a target of 1.30, as we see room for CHF to depreciate more than other reserve currencies as European tail risks recede," says Cahill.