By Andrew Bulkeley
Image by rawpixel.com from Adobe
The UK pound looks to be the surprise currency success in 2021 among the dollar, the euro and the pound as investors focus on recovering equity markets and central banks halt loose money policies. But at least one major bank says a rapid American recovery coupled with an inefficient European Union reaction to the pandemic elsewhere will lead to a greenback revival as well.
The pound gained nearly 4 percent against the dollar last year, ending 2020 worth $1.366, after investors welcomed the UK’s last minute agreement with the EU and fretted over the presidential transition in the US. The greenback also lost 9.8 percent against the euro, ending the year with a euro costing $1.23 after starting the year at $1.1202. The pound lost 4.7 percent against the euro last year to end the year at €1.221 but is already gaining against the joint currency.
But more normal economic forces, rather than political tiffs, are expected to weigh on the dollar this year. Investors are expected to move money into equities as economies gradually recover around the globe. Germany’s benchmark DAX, for instance, has been reaching all-time highs in March because of an expectation that corporate balance sheets will improve post-vaccination.
"We see GBP as the best placed among major G10 currencies and expect GBP/USD to breach 1.50 this year, helped by an anticipated return of the USD bear trend ..., fast UK vaccinations and a still undervalued pound," wrote Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, in a March note.
By comparison, the pound closed March 9 at $1.39, showing the dollar decline the Dutch bank still expects.
A third in the UK, less than 10% in the EU
The UK’s recovery is expected to be swift, with the government already having outlined how its economy will reopen this spring. The recovery stands in contrast to the EU where governments are still struggling with increasing disease rates after Brussels mishandled vaccine negotiations and AstraZeneca failed to deliver promised doses. Over a third of those over 16 had received a first dose of the vaccine in Scotland and England by early March compared to just over 9 percent in the EU as a whole.
But economists at Morgan Stanley recently revised their view of the dollar this year because of an expected strong recovery in the US backed by the $1.9 trillion recovery stimulus package expected to be signed by President Joe Biden any day.
“Our view on the USD in 2021 has evolved from bearish at the beginning of the year to neutral in mid January, and now takes a bullish skew,” Matthew Hornbach, Global
Head of Macro Strategy at Morgan Stanley, wrote in a recent note.
Brexit, what Brexit?
Investors are also beginning to bet on the Federal Reserve taking action earlier than expected, Morgan said, because a US economic recovery could lead to increased inflation.
But the consensus remains that 2021 is likely to be the year of the pound, rewarding London on its rollout of the vaccine program. Brexit, for the moment at least, seems forgotten.