Pound Sterling's Vaccine Star Could Fade Just as the Euro's Starts to Glow

- EU vaccine supplies to more than triple in April
- Just as UK vaccine supplies dwindle
- Slowdown in rollout could hurt GBP says Crédit Agricole
- UBS forecast GBP/USD towards 1.50, GBP/EUR 1.20

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The Euro's fortunes could change in April as the EU receives a substantial bump in vaccine supplies, a development that comes just as the UK sees its vaccine supplies come under pressure, spelling a potential reversal in fortunes for the Pound-Euro rate over coming weeks.

Vaccinations are considered by analysts to be an important input in foreign exchange market performance at present, as they offer covid-hit economies the prospect of a sustained and lasting release from damaging lockdowns.

The UK's lead in the vaccination race has been credited by a swathe of researchers we follow as one reason for the Pound's strong performance in the first quarter of the year.

Likewise, a slow rollout in the Eurozone has prompted economists to push back expectations for the region's economic rebound which has in turn been linked to the Euro's soft start to 2021.

"Europe’s vaccine program remains in first gear, and relative growth has moved strongly against EUR/USD. We stay neutral EUR/USD," says Brian Daingerfield, Head of G10 FX Strategy at NatWest Markets.

The divergence in fortunes between the UK and EU has allowed the Pound-to-Euro exchange rate (GBP/EUR) to rally from the year's opening level of 1.1130 to reach a new 13-month high on Monday March 29 at 1.1756, a level repeated again on Wednesday March 31.

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Yet, foreign exchange markets are forward looking in nature and therefore a shift in sentiment on relative vaccination rates could well determine how the Pound and Euro trade in April and through the second quarter of the year.

The UK is expected to see a reduction in the supplies of its vaccines following a bumper second-half of March, with vaccination centres told that a drop in supply was expected from March 29 and would likely last for four weeks.

"FX investors also seem to worry about a potential disruption of the UK’s vaccination campaign in April following the recent delays and restrictions of vaccine imports from the EU and India," says David Forrester, FX Strategist at Crédit Agricole.

Five million doses due from India in March were delayed by authorities in India who were concerned with a spike in domestic covid-19 cases, while the flow of vaccines from a Dutch manufacturer of the AstraZeneca vaccine are in doubt given the EU Commission has warned it would restrict exports if supply targets to the EU are not met.

"Given that the GBP’s recent rally relied heavily on the success of the UK vaccine rollout so far this year, any evidence that the rollout will be slowing could fuel concerns about delays of the government’s plans to reopen the economy and thus continue to hurt the currency," says Forrester.

Crédit Agricole say a more cautious stance on the British Pound is warranted as a result, even if risk sentiment starts to improve in the coming weeks.

The UK faces a new problem in April whereby the number of second doses jumps sharply, meaning that in order to maintain an edge in the vaccination race the country will need supplies to accelerate if the numbers receiving a first dose is to keep rising.

March 30 was the first day that second doses surpassed second doses with 224,590 new first-dose vaccinations administered, against 270,526 second doses.

The first doses number is now well below the 7-day average at 321,716, which is now falling (as per above chart).

Nevertheless, 46.3% of the total population has received at least one vaccine.

Question marks over the UK's vaccine supply come as Eurozone countries look forward to a sharp increase in supplies, the risk for those holding out for a stronger GBP/EUR exchange rate is that investors flip sentiment in favour of the Euro.

"We see the first signs of a pick-up in vaccines," says Imogen Bachra, European Rates Strategist at NatWest Markets. "The next few weeks will be key."

Image courtesy of NatWest Markets.

NatWest Markets have been flagging to clients for a few weeks now that April should be a turning point for the vaccination roll-out in the EU.

Daingerfield says the prospect of a strong upswing in vaccination momentum as supplies rise, improved valuations and lighter bearish positioning on the Euro "will at some point provide for entering a long EUR/USD position for a run up to 1.25".

NatWest tell clients the second quarter should see significantly higher supply from existing producers which include AstraZeneca, Moderna and Pfizer who should together deliver almost three times the amount of doses in the second quarter compared to the first quarter.

This is even after accounting for lower than planned AstraZeneca supply in the second quarter.

"Added to this, Johnson & Johnson vaccinations should begin, with supply reportedly being delivered to European countries from mid-April – this adds an additional 55 million doses to the Q2 total," says Bachra.

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A significant increase in the production and supply of the Pfizer/BioNTech vaccine alone is expected to drive a doubling in vaccine supply over the coming weeks, according to analysis from ABN AMRO who say the increased supplies should enable the EU to inoculate around 0.6% of the population per day.

This contrasts to the current rate of about 0.8% in the UK and U.S. at present. Given the supply dynamics that are expected the EU's vaccination rate could therefore leap that of the UK's.

"A further increase in supply will enable this pace to pick up further in June and July, to around 0.9% per day. While this is significantly less than projections by the Dutch government of an almost 2% daily vaccination pace by May, we expect this to mean that at least half of the over 50s will have been fully vaccinated by mid-June," says Bill Diviney, an analyst at ABN AMRO.

Diviney does however warn that the actual vaccination path depends on logistics and vaccination willingness keeping up with the increase in supply.

The AstraZeneca vaccine's reputation amongst EU citizens appears to have suffered damage owing to the recent stop-start of the rollout, with YouGov saying their latest polling now shows Europeans see the vaccine as unsafe.

In YouGov's previous survey in Germany, 43% said they believed the vaccine to be safe, compared to 40% who considered it unsafe. As of now, a majority of Germans think the vaccine is unsafe (55%) and just a third think it safe (32%).

In France, where more people had already considered the vaccine unsafe (43%) than safe (33%), those figures have now worsened to 61% unsafe and 23% safe.

In Italy and Spain, most people had previously felt that the AstraZeneca vaccine was safe (54% and 59% respectively).

Since then those numbers have fallen to 36% and 38% - in both cases lower than the proportion who feel the vaccine is unsafe.

Nevertheless, ABN AMRO say any pickup will be likely to reduce pressures on the bloc's hospital system which is a prime objective of the vaccination rollout.

"It should be enough to sufficiently relieve the pressure on ICU capacity in hospitals and to enable a reopening of the economy – potentially a couple of weeks sooner than our base case of end-June/early July," says Diviney.

Expectations for a recovery in the Eurozone economy - albeit delayed - in the second half of the year could prove a necessary catalyst to a more enduring recovery in the Euro.

Analysts at UBS say that they expect the narrative on Sterling to become more challenging as the flow of vaccine supplies to the UK dwindle.

"Moreover, an ongoing spat with the EU about the export of vaccines is likely to keep the news flow challenging," says Thomas Flury, Strategist, at UBS.

However, UBS expects these challenges to subside and the UK's exit plan from the lockdowns to continue uninterrupted.

"A recovering economy, supported by high levels of savings, pent-up demand for services, and very accommodative fiscal stance is likely to keep the Bank of England (BoE) in a moderately hawkish mood," says Flury.

"We believe a BoE at the hawkish end of the spectrum, the pro-cyclical nature of the pound which will likely benefit from the wider global economic recovery, and a resumption in investment in the UK now that the majority of the Brexit uncertainty has subsided should lead to further gains in the pound as the year progresses," he adds.

UBS forecast the Pound-Dollar exchange rate at 1.51 by March 2022 and the Pound-Euro exchange rate at 1.2050 by this time.