GBP/USD consolidates not far from 1.4000 as bulls remain in control

GBP/USD is on course for its strongest one-day gain since 12 January, up more than 0.8% or about 120 pips on the day and came ever so close to touching the 1.4000 level for the first time since April 2018 midway through the European trading session. The pair has spent most of the last eight or so hours consolidating in the upper 1.3900s as bulls catch their breath ahead of what they will hope is the next leg higher for the currency pair.

On the week, GBP is far and away now the best performing currency in the G10, up nearly 1.0% versus the US dollar. That compares to the euro, which is down 0.2% and JPY which is down 0.7%. On the month, it’s a similar story, with GBP the best performer and up more than 2.0% versus the US dollar. AUD is not too far behind, up 1.75% versus the US dollar, and was the best performer on the month prior to Thursday’s session. GBP’s stellar performance compares to the euro, which is down 0.3% and JPY, which is down 0.9%.

Driving the day

GBP continues to benefit from vaccine optimism-related tailwinds, with the country now having surpassed 16.4M vaccine doses delivered, up nearly 500K on the day. If the government can maintain this pace, all adults should have been offered their first vaccine by the government’s target of the end of May.

Sterling bulls are also drawing hope from the continued sharp drop in Covid-19 infections, hospitalisations and deaths in the UK. The ongoing Imperial College of London study that tests tens of thousands of UK citizens every week to estimate the prevalence of the virus in the community shows that the number of currently infected persons has dropped by two-third since the start of January to around 0.5% of the population.

It remains unclear at this point as to how much of that is down to the lockdown and how much of that is down to the vaccines. Data from Israel, whose vaccination drive is well ahead of the UK’s in terms of the percentage of the population who has been vaccinated, has been conclusive in showing that vaccines do cause infections to fall. Over the next two months, the government will be expecting to see infection rates drop disproportionately in vaccinated groups versus unvaccinated groups and confirmation that this is the case, alongside falling infection rates, will set the stage for reopening.

An early reopening timetable compared to many of its major developed market peers is likely to result in UK economic outperformance, as the “post-Covid-19” recovery gets started early. UK consumers have built up a large buffer of savings over the past year amid closures in the service sector (i.e. hospitality and tourism) and expectations are for pent-up demand to be unleashed over the summer.

Downside risks

It is worth noting some downside risks to the above-outlined scenario, however; a survey by the Resolution Foundation, released on Wednesday, showed that about 2.6M UK workers, or 8% of the workforce, expect to lose their jobs in the next three months. The UK government can keep this number down and minimise the economic damage of such losses if it opts to extend its furlough job retention scheme. But if it opts to go down the more fiscally conservative route, job losses may be a drag on the post-Covid-19 recovery.

UK Finance Minister Rishi Sunak will have some hard thinking to do ahead of the unveiling of his next budget on 3 March. Most analysts expect that given the high pressure on fiscal policymakers to over rather than under-deliver across the globe, Sunak will extend the scheme. Separately, Sunak is expected to announce an extension of the business rates holiday for the retail, hospitality and leisure sectors, which had been expected to end on 31 March.

Meanwhile, latest reports from the FT suggest that Sunak is going to delay a review of business rates until the Autumn budget; the review is expected to make the case for a digital sales tax to “level the playing field” between online and high street retailers.