GBP/USD: UK government’s bold approach boosts the pound

The pound has been one of the best performing G10 currencies at the start of this week with cable rising back up towards 1.3900 after hitting a low late last week at 1.3733. As economists at MUFG Bank note, the UK government embraces learning to live with COVID-19 approach, supporting the pound.

UK government encouraged by impact of vaccine roll out

“The main trigger for pound outperformance at the start of this week has been the announcement from UK Prime Minister Boris Johnson yesterday that the government plans to proceed with the final stage of easing COVID-19 restrictions on 19th July following a four week delay.”

“The plans to more fully reopen the UK economy are expected to lead to a significant pick up in covid cases but the government is confident that the NHS will be able to cope better than in previous waves given the vaccine roll out is expected to reduce the relative number of severe of cases.”

“Allowing the UK economy to more fully re-open supports our bullish outlook for the pound. We expect EUR/GBP to fall into the low 0.8000’s as the UK economy continues to recover more robustly through the rest of this year, and speculation continues to build over BoE rate hikes as soon as next year.”

“However, the bold approach from the UK government is not without risks. The first potential problem will be that a sharp increase in hopefully ‘mild’ COVID-19 cases while maintaining the legal requirement to self isolate will create disruption as more people are likely to have to isolate as they come into contact with more cases. The second bigger problem will come if the government’s calculations prove inaccurate and pressure on the NHS proves more challenging and then ultimately requires another lockdown heading into the autumn/winter. It would then trigger a correction lower for the pound if renewed restrictions are required.”

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