• Positioning relax a bargain in GBP
  • Support also comes from high expectations for the BoE to rise
  • Amid hopes UK Covid cases have peaked
  • Johnson hints at reducing self-isolation times

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The near-term outlook for the pound remains constructive on hopes that the UK Covid cases have peaked amid a continued unwinding of bets placed against the currency during the latter part of 2021.

The UK reported 142K new cases of Covid-19 on Monday, February 10, up from 157K positive for the same day a week earlier.

“There are signs of a spike in Omicron cases in London, this seems to suggest a similar infection profile to South Africa, with cases peaking around three weeks after the initial outbreak,” said said Jeremy Stretch, head of G10 FX strategy at CIBC Capital. Markets.

But it’s not just London where cases are dropping, as every country in the UK and parts of England have now seen the increases in cases flatten out or start to decline. Indeed, for the UK, cases have now dropped week by week for five consecutive days.

“Such a result could suggest that after a weaker than expected end of 2021, the prospect of a rebound in the second half of the first quarter validates the prospect of a rise in the MPC in February,” adds Stretch.

CIBC Capital Markets expects EUR / GBP to fall further due to ongoing developments and expects 0.8295 to be reached eventually (GBP / EUR rises to 1.2055).

Covid case in UK Gov.uk

Above: Number of new UK cases (people who have had at least one positive COVID-19 test result) by date reported.

  • Reference rate at publication:
    GBP to EUR: 1.1988 GBP to USD: 1.3586
  • High bank rates (indicative): 1.1752 1.3306
  • Payment specialists prices (indicative: 1.1930 1.3518
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Meanwhile, the UK government is reportedly considering reducing the period of self-isolation from Covid-19 from seven to five days, a move that could lessen the blow to the economy from the growing number of workers self-isolating. following positive Covid tests.

Speaking to reporters earlier this week, Prime Minister Boris Johnson said ministers plan to reduce the period of self-isolation for fully vaccinated people who test positive for the virus.

While the government has put in place some measures to contain the spread of Omicron, economists say the biggest negative economic impact of the latest wave is an increase in the number of self-isolation and a sense of moderate consumption.

A combination of the two factors would be the main contributors to an expected decline in economic activity in December and January.

But the drop in the number of cases and a shortening of self-isolation times would open the door to a rebound in economic activity in February, which will strengthen expectations of a further interest rate hike at the Bank of Canada. England and is therefore generally favorable to the pound.

The British pound rallied back to the key 1.20 hurdle against the euro and held on to the 2022 lead against the dollar as markets reacted to a global bond sell-off which meant yields on UK and US bonds hit their highest levels in months.

The rise in bond yields is symptomatic of an investor who believes that the US Federal Reserve and the Bank of England will have to adopt a more “hawkish” policy in 2022 in the face of soaring inflation levels.

The pound is the best performer of 2022

Above: The pound is the best performing currency of 2022.

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Much of the Pound’s December-January rally against the euro, dollar and other currencies is due to rising investor expectations that the Bank of England will raise rates earlier and higher than other countries .

Hopes of a strong economic rebound from the Omicron wave will only bolster expectations for the Bank of England to raise interest rates for the second time in three months at its February meeting.

Money markets are forecasting a more than 70% chance of another UK rate hike next month and rates above 1% by the end of the year, more than US rates. This has supported the demand for the pound, “said analyst George Vessey. at Western Union Business Solutions.

“The divergence in monetary policies is currently working in favor of the pound sterling and with the COVID-19 cases set to be rolled over soon, the UK may have avoided another strict lockdown, which bodes well for its economic recovery – further supporting the pound, ”he adds.

The rally in US and UK bond yields has so far proven to be favorable momentum for the pound sterling. Therefore, the longer this theme can last, the more buyers sterling will find.

“The tightening of yield spreads against the United States has been the main driver of the pound’s recovery, reflecting expectations of a second bank rate hike by the BoE already at the next meeting on February 3. L The improvement in sentiment on the evolution of the pandemic has also contributed positively “, Asmara Jamaleh, economist at Intesa Sanpaolo.

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The exchange rate between the British pound and the euro again tested the level of 1.20 on Monday before a market sell-off occurred during the US session, which saw the UK currency cut some of the gains .

These moves are a reminder that general market sentiment is also important for the pound and that there are a number of factors that determine the value of the pound at any given time.

Global markets have feared the rise in bond yields, believing that they are a sign of tightening monetary conditions which in turn will weigh on consumers and businesses, slowing economic growth in the future.

But, as we discussed earlier, these rising bond yields are also turning out to be favorable to the pound sterling, so the negative impact of the market’s sell-off is contained by the direct positive impact that rising yields have. currently on the pound sterling.

The pound remains the best performing G10 currency of the year so far, with a gain of 0.20% against the best performing US dollar of 2021 and a gain of 1.0% on the single currency of the eurozone.

“The British Pound has also expressed directional momentum over the past three weeks, mainly rising against the dollar, from GBP / USD 1.31 to 1.36, but also against the euro, from EUR / GBP 0.85 to 0.83, updating here its highs from the start of the year, ”says Jamaleh.

The strong start was also due to a market that was poorly positioned on the currency, as CFTC data revealed the market was maintaining a net ‘short’ against the currency, with investors betting further lows.

When the market is sharply “short” against a currency, a counter-trend shock can force these positions to unwind, creating technical momentum that generates additional gains.

Positioning on the headland

Image courtesy of Scotiabank.

“Real money investors aggressively reduced GBP short positions until early 2022, with the weekly position correction being the most aggressive since late October,” Stretch said.

Investors will likely continue to exit the accumulated net short position against the British Pound over the next few days and bring the market to a more balanced state.

However, it would only be when a net ‘long’ position built up – as seen in the first part of 2021 – that positioning would start to be a headwind for the UK currency.