GBP/USD steadies at multi-year highs above 1.3900 level

It’s been a stellar session for pound sterling, despite market volumes being low on account of market closures across China and North America. Cable has managed to reclaim the 1.3900 level, though volatility has died right down since European participants left the market around 17:00GMT. Volumes should pick up again from 23:00GMT onwards as Asia flow arrives. At present, the pair trades higher by about 0.5% or 60 pips on the day. In terms of on the month performance, the pair is up over 1.5% and, out of the G10, is only being outperformed by AUD and NOK.

Driving the day

Whilst the USD’s struggles are in part related to a lack of safe-haven demand (global equity and crude oil markets continue to push higher, weighing on the likes of JPY in particular, but also USD and other safe-haven assets such as US government bonds), strength in GBP/USD is also a factor; GBP/USD, which is up 0.5% on the day, has a 11.9% weighing in the Dollar Index, so is in part to blame for dollar downside.

In terms of what is driving GBP outperformance; the weekend saw familiar and overwhelmingly positive news regarding the UK’s vaccination efforts. The country has met its self-imposed target to vaccinate all four of the most at-risk groups by mid-February. As of Monday, over 15.3M people have now received their first vaccination, meaning nearly one quarter of all adults in the UK have been vaccinated.

Meanwhile, newly reported infections continue to drop (under 10K new cases were reported on Monday, down from highs over 70K per day back in January) and the daily death toll has also seen a sharp drop and has been in the 200s for the past two days (although the daily death toll is typically lower at the weekend due to reporting/procedural issues). Weekend reports suggest that the government is forecasting that the number of hospitalised Covid-19 patients will halve in the next month.

As a result of the UK having reached an important vaccination milestone and the continued sharp drop in new infections, hospitalisations and deaths, talk has inevitably shifted to economic reopening. UK PM Boris Johnson said he will unveil the UK’s roadmap out of lockdown on 22 February. This will start with schools being allowed to reopen on 8 March and perhaps some easing of restrictions on socialising outdoors. Restrictions on non-essential retail and hospitality is then likely to be eased in April. Lockdown-skeptic MPs from within the Conservative Party are reportedly putting a lot of pressure on the UK PM to reopen the economy as fast as possible. Assuming that vaccines work, the stage is set for UK economic outperformance later in the year as the country enjoys herd immunity by the Summer.