Euro comes back against the pound

The euro is in a comeback phase against the pound, due to vaccination rollout improvements and some good economic data.

“The British pound is on course to record its sharpest weekly decline against the Euro since September 2020, a time when the EU and UK faced a logjam in Brexit trade negotiations that lead markets to raise bets a ‘no deal’ outcome was increasingly likely,” notes PoundSterlingLive.

The decline has a number of interesting factors behind it. Unquestionably the issues that have arisen in the UK vaccine rollout are one of the factors, the analysts say.

“There doesn’t seem to be that many positives left for the GBP, especially if one looks beyond the positive seasonal effect in April. Indeed, the slowing pace of the Covid vaccinations in the UK could ultimately delay the government’s plans to reopen economy despite the recent proclamations of PM Johnson,” says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The problem in the UK relates to all the questions that have arisen about the AstraZeneca vaccine.

The GBP/EUR exchange rate declined by a third of a per cent on Friday (last trading day until late Sunday) to record a five-week low at 1.1517, down from a high of 1.1800 at the start of the week.

The weekly decline is now about 2 per cent.

“The British pound fell to a five-week low against the Euro and a 1-week low against the US dollar after Europe’s drug regulator found a link between AstraZeneca’s Covid-19 vaccine and blood clots. The UK medical regulator abruptly changed its guidance over the vaccine too, which could complicate the vaccination campaign in the future,” says George Vessey, UK Currency Strategist at Western Union Business Solutions.

The first few months of 2021 saw the euro falling back on lockdown news, but the arrival of April shows the beginning of a seasonally strong period for the single currency.

“In fact, with the worst month of the year for the US Dollar and the best month of the year for the euro now under way, there is a quantitative tailwind that may help the euro claw back some of its early-year losses,” writes analyst Christopher Vecchio, at DailyFX.

Helping bolster the euro’s case for a rebound through the first full week of April has been a small but meaningful shift in interest rate differentials that support recent strength in EUR/JPY, EUR/GBP, and EUR/USD: while Japanese government bond yields, UK Gilt yields, and US Treasury yields have pulled back from their yearly highs, German Bund yields have pulled back less.

Markets will keep a close eye on the vaccination rollout data coming out of the UK, markets will keep a close eye on Covid data coming out of the UK as measures have been eased and numbers are expected to rise again. Some countries have even had to reinstitute lockdowns; Chile, which has one of the highest vaccination rates in the world has had to lock down again due to recurrent surges of infection.

All this recent news means the pound has come under pressure, and as it had one of the longest moves upward among the major currencies, the negative news may have had an exaggerated effect.

Another factor is driving euro strength. “Analysts are saying at least some of the gains can be attributed to a member of the European Central Bank saying emergency measures introduced to deal with the pandemic could be fazed starting in September.

“ECB Governing Council member Klaas Knot said the emergency quantitative easing programme – known as PEPP – was on target to be fazed out from September 2021 through to March 2022 thanks to expectations for stronger economic growth in the outlook,” writes PoundSterlingLive.

But it is unlikely that the euro will rise sharply against the dollar as well as against the pound. There is great belief in the global financial world that the Biden stimulus will strongly boost the US economy. Given the volatility in Europe, and the UK, with changing conditions in Asia, both major and emerging market currencies are expected by most analysts to drop against the greenback.

However, some improved economic data is helping the pound.

Howard Archer, chief economic advisor to the EY ITEM Club, noted in a recent article that Britain’s jobless rate dropped to 5.0 per cent in the three months to January as the country entered into a new lockdown phase. Experts believe that the drop partly reflects how people stopped looking for jobs due to stricter restrictions in the early part of the year. The jobless rate fell from 5.1 per cent in the last quarter of 2020 to 5.0 per cent in the three months to January.