Sharp Drop in Covid Cases Boosts Pound Sterling's Outlook say Analysts

- 38% w/w drop in Covid cases
- GBP a buy against EUR: RBC Capital
- UK experience offers hope for global market outlook

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The British Pound's outlook is brightening on signs a third wave of Covid-19 infections in the UK is ending according to analysts, with one saying they are recommending investors buy GBP/EUR this week as a result.

The UK on Monday reported a sizeable 38% drop in week-on-week Covid-19 cases, news that came alongside a rally in the Pound against all the G10 currencies apart from Sweden's Krona.

"The pound is enjoying a boost in response to recent declines in Covid cases," says Joshua Mahony, Senior Market Analyst at IG.

24,950 new positive cases were reported today on Monday, down on the 39,950 reported last Monday.

"There is no doubt that investors will want to see cases and deaths ease off before they can trust the vaccination barrier to allow restrictions to remain lowered," adds Mahony.

A rise in Covid-19 cases through June and July have coincided with lower levels of mobility, consumer spending and business confidence even as lockdown restrictions were lifted, suggesting rising cases can have a very real impact on the economy.

The impact of rising cases was clearly evident in July PMI data out last week that revealed the UK economic rebound was slowing, with businesses citing rising Covid-19 cases as a major concern.

The impact of rising cases is not just reflected in lower confidence levels but also in the significant numbers of employees sent home to isolate having been in close proximity to someone who has tested positive.

Risks to the outlook posed by rising virus cases last week lead a member of the Bank of England's policy setting committee to say it was too soon to consider raising interest rates and end quantitative easing.

Jonathan Haskel, External Member of the Bank's Monetary Policy Committee (MPC), said the rise of the Delta variant of Covid-19 combined with the ending of government support schemes over coming weeks means the Bank must remain risk averse and keep its generous settings in place.

Therefore should the headwind to the economic revival posed by Covid ease over coming days and weeks then the Pound could find itself better supported as the Bank of England will find itself presiding over an economy with a materially improved outlook.

"The pound has been performing better of late and is the 2nd best performing G10 currency over the last 5-day period. If we do not get any notable pick-up in infections over the coming days, market participants are likely to conclude that the UK government’s strategy is working and that this strategy could be replicated in other countries with higher vaccination rates," says Derek Halpenny, Head of Research, Global Markets
EMEA & International Securities at MUFG.

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Pound Sterling Live was early to detect a shift in Covid dynamics and reported well ahead of other publications - and indeed analysts - that the pandemic picture in the UK could soon turn increasingly supportive of the UK currency.

Subsequent data releases have confirmed this expectation and Adam Cole, Chief Currency Strategist at RBC Capital Markets, says he is buying the Pound against the Euro as the currency market reacts.

"Recent days have bought welcome good news on COVID-19 infections in the UK," says Cole in a regular currency briefing.

"In the very near-term, we think GBP can take the latter as positive (we are short EUR/GBP in this week’s Trade of the Week), but we are alert to the risk the trend changes in August," he adds.

The UK government opted to go ahead with the lifting of all major Covid-19 restrictions on July 19 despite Covid-19 cases rising, believing that the impact of the wave would be less keenly felt by the health service now vaccines have been offered to nearly 70% of the total population.

The decision will be keenly watched by other governments who are seeing cases start to rise in their own countries; do they tighten restrictions or put their faith in vaccinations and ride out the spike?

"The UK remains the key test case for what happens when a country with a high rate of vaccination commits to returning life to normal and eases restrictions even as infections rise," says Holger Schmieding, Chief Economist at Berenberg Bank.

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He adds that from an economic point of view, the data out of the UK paints a positive picture: 1) vaccines are working; and 2) economic data have largely decoupled from virus trends. "No virus wave can last forever".

"If the UK manages to ride out the Delta wave without overwhelming its hospitals or reintroducing economically damaging restrictions, that would provide a positive signal for other advanced economies that have also eased restrictions after reaching a similar level of vaccination but are a just a few weeks behind the UK in terms of new infections," says Schmieding.

If the UK has truly beaten the third wave and other developed markets use the experience as a blue print for their own response then the negative impact of Covid on a global economic scale is greatly diminished.

For Sterling this is an added upside development given the currency is highly responsive to broader investor sentiment.

The Pound fell sharply at the start of the week commencing July 19 when investors across the world took fright of rising cases of the Delta variant.

The subsequent market recovery saw the Pound recover some lost purchasing power and should investor fears over the Delta variant be downgraded this trend can run further.

"England will be a fascinating test case over the next few weeks as to how easy/difficult it will be to fully open up a highly vaccinated country with high levels of Delta in the community. It really could turn a lot of the global negativity from Delta seen over the last couple of months around or it could be a failure and consign us to a very difficult period up to and including winter," says Jim Reid, a strategist at Deutsche Bank.

"I really think this is potentially very very good news for the globe," he adds.