ING today lifted its forecasts for the pound, citing Covid-19 developments, central bank policy and Brexit. This year they see GBP/USD rising above 1.50 and EUR/GBP dropping to 0.85.
The reopening process
The UK’s vaccination programme has got off to a strong start. As of January 31st, a total of 9.8 million jabs had been administered to residents in the UK, which equates to 14.7 doses administered per 100 residents. The Eurozone has struggled to keep up amid supply disruptions and logistical issues. At current vaccination rates, the UK will likely be able to start reopening its economy earlier than most, if not all, of the other major European economies.
“In reality, we may only be talking a couple of months, in which case it’s unlikely to make a lasting difference to the recovery paths,” ING said. They also note that the risk to the recovery comes from new variants of the virus. If the efficacy of the vaccines is reduced by the new strains then there would be a larger downside risk to the UK, given the more advanced stage of the recovery.
The Bank of England meets on Thursday and expectation is for the central bank to keep rates at their current record low. There had been some suggestion that negative rates could be used by the central bank but Governor Andrew Bailey has cautioned on the benefits and UK economic optimism is seemingly on the rise amid the vaccination effort. Nevertheless, it seems unlikely that they will completely rule out the ability to do more if the economy warrants further stimulus.
The ECB is also unlikely to add further stimulus in the near term but will still likely keep all options open should they need to. “So with neither central bank imminently poised to add stimulus, the question is, what happens regards tightening in 2022?” ING asks. “Out of the two, the Bank of England is more likely to stop actively expanding its balance sheet next year – though rate hikes are unlikely on either side before 2023.”
Late in December, the UK and European Union reached a trade deal after years of uncertainty triggered by the UK vote to leave the EU. “With the risk of a hard Brexit out of the way and the UK set to benefit from faster vaccination vs. the eurozone, we expect EUR/GBP to start gradually converging towards its medium-term BEER fair value.” ING said. They also note the current political instability in Italy and upcoming votes in Netherlands and Germany that could impact the single currency.
With all that in mind, ING is calling for EUR/GBP to drop to 0.85 by Q3 of this year before falling to 0.82 by the end of 2022. They also expect the pound to appreciate against the US dollar and see 1.53 by the end of this year, rising to 1.52 in Q2 of 2022, before falling back to 1.52 at the end of the year.