Pound Sterling Weakness against Euro & Dollar Linked to Vaccine Rollout Concerns, Position Unwinding

- GBP in sharp April decline
- AstraZeneca vaccine setback cited
- GBP also said to be expensive
- But UK to reach 'heard immunity' on Monday

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The British Pound has lost value against most of its key rivals during the first week of April, a month many analysts have said is one that historically sees the currency appreciate.

The losses come amidst a further disruption to the UK's vaccine rollout and an unwind of crowded bets for further gains in the currency, which hints that an element of the decline could be linked to technical considerations.

"There doesn’t seem to be that many positives left for the GBP, especially if one looks beyond the positive seasonal effect in April. Indeed, the slowing pace of the Covid vaccinations in the UK could ultimately delay the government’s plans to reopen economy despite the recent proclamations of PM Johnson," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The Pound-to-Euro exchange rate (GBP/EUR) fell back by over half a percent to reach a low of 1.1542, adding to the 1.11% decline suffered the day prior.

The Pound-to-Dollar exchange rate (GBP/USD) declined half a percent to record a daily low of 1.3729, adding to the prior day's 0.60% loss.

"The British Pound fell to a 5-week low against the Euro and a 1-week low against the US Dollar after Europe’s drug regulator found a link between AstraZeneca’s Covid-19 vaccine and blood clots. The UK medical regulator abruptly changed its guidance over the vaccine too, which could complicate the vaccination campaign in the future," says George Vessey, UK Currency Strategist at Western Union Business Solutions.

Above: GBP/EUR loses altitude in April.

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Despite the losses of early April, the Pound is still up 3.60% against the Euro in 2021 and is up 1.0% against the Dollar.

FX analysts maintain that a sizeable portion of the Pound's 2021 rally can be attributed to the UK's rapid vaccine rollout which puts the country's economy on course for a sustainable reopening ahead of many of its major peers.

The UK is expected to reach the herd immunity threshold by Monday, according to University College London modelling, which could lower the prospect of a surge in covid-19 cases as society continues to reopen.

According to UCL, the number of people who have protection against the virus either through vaccination or previous infection will hit 73.4% on April 12, which is enough to tip the country into herd immunity.

Gains against the Euro have been particularly notable given the EU's slow start to its vaccination programme, however the advance against the Dollar stalled in March in tandem with the accelerating vaccination programme in the U.S. that could see all adults invited to receive a vaccine from April 19.

Sterling is likely to remain sensitive to developments concerning relative vaccination rates and any potential breakdown in the positive vaccine narrative could therefore prompt declines.

The UK is expected to see a reduction in the supplies of its vaccines in April 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.

This drop in supply appears to be reflected in the sharp slowdown in UK vaccination rates in early April:

Image courtesy of @UKCovid19Stats

A further setback to the UK's vaccination programme and Sterling upside comes amidst concerns over blood clots linked to the AstraZeneca vaccine, which is the mainstay of the UK's programme.

At two separate press conferences held on Wednesday, running concurrently, the EU and UK regulators said all age groups should continue to get the AstraZeneca vaccine, but the UK regulator said those in the 18-30 age group should be offered an alternative vaccine where available.

However, the guidance update prompted Chief Medical Officer Jonathan Van-Tam to confirm the "effect on the timing of our overall programme should be zero, or negligible".

The vaccination programme will likely be underpinned by an earlier-than-expected delivery of Moderna vaccines and expectations that the Novavax and Johnson & Johnson vaccines will be approved for use in the UK in April.

"The UK will roll out the Moderna vaccine for the first time, two weeks ahead of schedule, which may alleviate some concerns around the speed of the UK’s vaccination programme," says Bipan Rai, North America Head, FX Strategy at CIBC Capital Markets.

Analysts are also questioning just how much more advantage the UK's vaccination programme can deliver and ask whether the good news is already 'in the price'.

Indeed, with well over 50% of adults now vaccinated the prospect of a viscous resurgence of the covid-19 pandemic becomes increasingly remote.

As such, benefits to Sterling bulls of further vaccinations becomes prone to the law of diminishing returns.

The Eurozone is meanwhile likely to see a rapid acceleration in vaccinations in April, closing a gap with the UK and potentially leading investors to question the GBP/EUR exchange rate rally.

"The GBP is expected to gradually lose its advantage and consolidate as the situation in Europe improves in the coming months. Similarly, the UK economy will remain fragile until business investment shows real signs of recovery against the backdrop of Brexit and its attendant uncertainties," says Dirk Schumacher, Forex Strategist at Natixis.

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Natixis still expect the EUR/GBP to return to around 0.88 by the third quarter, which gives a GBP/EUR exchange rate of 1.1363.

Questions over Sterling's valuation are also being asked in the wake of its rally, with one analyst saying a new driver might be required to reinvigorate the uptrend.

"GBP has struggled in recent weeks to find new momentum. Thanks to its somewhat meteoric rise so far this year, this lack of sustained upward price momentum has fuelled second guesses of a correction in the UK currency," says Charles Porter, Market Analyst at SGM Foreign Exchange.

"The problem for navigating the immediate future of GBP lies in the fact that fundamentals lie in favour of buying the currency, but it’s lofty price, at least compared with its intra-pandemic valuation creates conflicting forecasts," he adds.

This sentiment is echoed by Mark McCormick, Global Head of FX Strategy at TD Securities:

"GBP remains overpriced against most of the major European currencies on global growth and risk."