Pound Sterling Forecast to Outperform Euro but Stay Steady against the Dollar as Vaccinations Win the Race against the Indian Variant

- GBP expected to overcome Indian variant concerns
- GBP/EUR forecast to end 2021 higher
- GBP/USD forecast to churn current levels

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The British Pound is being tipped to advance against the Euro but tread water against the Dollar for the remainder of the year, thanks to a strong vaccine-inspired economic rebound.

New analysis from CIBC Capital Markets - the global lender and investment bank based in Toronto - shows that the UK is currently in a race to vaccinate its population as a new Covid-19 variant threatens a third wave of infections, if the vaccinators can win the race then the Pound can stay bid.

"Strong consumer led activity, impacting the rate cycle, should provide support for the currency, which should hold relatively steady against the USD but outperform the euro and yen," says Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets in London.

In their latest regular currency forecast briefing to clients CIBC Capital Markets say the key risk to the Pound's outlook is the rising tide of Indian variant which "threatens to blow the re-opening timetable off course".

The variant is believed to be substantially more transmissible than the variant responsible for the UK 'second wave', meaning it is able to punch itself into unvaccinated populations with ease.

Vaccinations do however mean that the infections are not translating into increased hospitalisations which will be a key test for the government when it decides on whether or not to fully drop restrictions on June 21.

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The UK reported Thursday that half of all adults had now received two doses of the Covid-19 vaccine, which is expected to provide this portion of the population strong protection against the variant.

Indeed, new NHS data, shared with The Independent, reveals the number of coronavirus patients in hospital across England has fallen in the past 24 hours after a sustained rise during the past week.

"The variant doesn't appear that resistant to those who have completed their vaccination program, so in the race between vaccinations and the virus, we favour the former," says Stretch.

Foreign exchange analysts do however say that the majority of businesses shuttered during the most recent lockdown are open once more and therefore the final easing due for June 21 will only be of marginal impact to the overall UK economic narrative and Sterling.

As such, a number of analysts we follow say any negative impact to the Pound caused by a delay to easing will prove short-lived.

"It is notable that credit and debit card spending data has reached 96% of the average level seen in February 2020 even before the UK has reached the final phase of re-opening planned for 21 June," says Stretch.

For those watching Pound Sterling exchange rates in the near-term the evolution of the pandemic ahead of the June 21 date will continue to be of interest and analysts expect the Pound to come under some pressure should 'freedom day' be delayed.

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But for those watching the Dollar and Euro ahead of the weekend, the U.S. jobs report due Friday will be of importance.

This is because not only will Dollar moves impact on the Pound-to-Dollar exchange rate, but they will also impact on the Euro-to-Dollar exchange rate which will in turn determine how the Pound-to-Euro exchange rate ends the week.

(On Thursday we saw the Dollar push both the Euro and Pound back, but the Euro's retreat was more severe which afforded a rise in GBP/EUR).

The key announcement of the week for the Dollar, indeed of the month, will be Friday's U.S. non-farm payroll report that will cast a light on how the world's number one economy labour market is recovering.

A strong reading is expected to be supportive of the Dollar as it will imply the market is expecting the U.S. Federal Reserve to start seriously considering 'tapering' its quantitative easing programme in coming months, which would pave the way to an interest rate rise in 2022.

"The U.S. dollar firmed ahead of influential American jobs data over the balance of the week. The buck rose against the euro and kept above multiyear lows against rivals from the UK and Canada. A run of strong U.S. data has helped to slow the anti-dollar trade that has gained traction this quarter," says Joe Manimbo, Senior Market Analyst at Western Union Business Solutions.

The market is expecting a strong reading on Friday given the two separate reports detailing labour market trends out Thursday easily beat expectations and suggested the jobs market was improving.

Weekly Initial Jobless Claims came in at 385K, which is below the 390K analysts had forecast.

The ADP Nonfarm Employment reading for May came in at 978K, ahead of the 650K market was expecting and making a substantive improvement on the April reading of 654K.

The Dollar advanced against all its major peers in the wake of the data.

"We’re expecting a run of strong payroll reports ahead as the level of activity in labour-intensive services sectors continues to pick up," says Bipan Rai, North America Head of FX Strategy at CIBC Capital Markets.

The U.S. Federal Reserve now operates a policy of supporting the labour market as well as managing inflation, meaning they will only consider raising interest rates should the labour market look to be on the mend.

The data is telling us that their concerns for jobs might soon start easing and their guidance become more 'hawkish' as a result.

This would be supportive of the Dollar.

"We’re looking for US real yields to move higher towards the end of the year and to take the USD higher across several currency pairs as well," says Rai.

The Pound-to-Dollar exchange rate is forecast by CIBC to end 2021 at 1.41.

The Euro is meanwhile seen being held back by a cautious European Central Bank (ECB) that will prove loathe to reduce its quantitative easing programme too soon.

The June 10 meeting of the ECB is the next major hurdle for the Euro's 2021 recovery to leap, but overt caution from ECB President Lagarde will likely trip them up.

"The ECB President will continue to view the recovery as requiring policy support," says Stretch.

"Even if the euro sees some temporary momentum on upcoming data or the prospect of an eventual slowing in bond purchases, we don't see that move being sustained in the face of a gradually more hawkish tone from the Fed," he adds.

The Pound-to-Euro exchange rate is forecast by CIBC to end 2021 at 1.1760.

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