British Pound Sterling breaks out
In view of the vaccination rates, the post-Brexit UK economy is proving resilient which can be seen by the rising strength of the GBP, particularly in relation to USA, Europe and much of the developed world. The UK has achieved vaccination rates (as a percentage of the general population) 1.5 times greater than the US and almost 5 times greater for both Canada and the EU.
As coronavirus restrictions impacted productivity, the UK economy shrank by 9.9% last year, official figures show. According to ONS (Office for National Statistics), the contraction in 2020 was more than twice as much as the previous largest annual fall on record. However, after inflation picked up at the end of the year, the economy looks prepared to escape a double-dip recession.
In December, as some constraints eased, the economy expanded by 1.2%, after shrinking by 2.3% in November. The growth meant that the economy grew by 1% in the October to December quarter. As a result, what might have been the first double-dip recession since the 1970s is likely to be avoided by the UK. A double dip is when the economy recovers from recession temporarily, only to sink back rapidly.
In March 2020, the sterling fell to its lowest level against the USD in 35 years due to the disruptions caused by the global pandemic. It further fell to $1.14 by the end of March. Since then, the sterling has slowly strengthened and recently hit a new 34-month high against the US dollar on 16th February, after the release of upbeat economic data. The GBP/USD exchange rate was quoted at 1.3960 on 18th February. In Q4, the British preliminary GDP reading showed 1.0% growth, while the reading for Q3 was 16%. The UK business investment index improved by 1.3%, beating a decline of 1.4% in forecasts, while the good trade balance index showed a deficit of £14.3 billion pounds, better than £15.2 billion in forecasts.
Traders in London at JP Morgan's currency desk say, on a tactical basis, the next major upside stage for the GBP/USD exchange rate is 1.4000. The major shift in sentiment towards the pound according to analysts has a lot to do with the Bank of England, which effectively announced on February 4 that negative interest rates will not be imposed in the UK in 2021, leading to a significant revaluation of the assets of the pound and the financial market of the UK.
We can expect UK equities to finally improve this year, after years of the UK’s underperformance in the equity market. In the second half of this year, a robust economic recovery could help UK equities outperform those in the U.S. Some of this outperformance would be attributed to rising oil prices, which would complement the energy-heavy FTSE 100. By the end of the year, economists expect that oil prices will rebound to $70/barrel.
The UK has given jabs to around 23% of its population and is continuing its vaccination campaign at a rapid rate. All in all, a strong economic recovery is directly associated with the strengthening of the British Pound; the smooth delivery of vaccines and a decline in COVID-19 cases can further help the economy develop sustainably and outpace other economies that are lagging with vaccine rollouts.