Published: April 2nd, 2021
Sterling and the euro are both likely losers in a disagreement over vaccines between the EU and UK, with the greenback the most likely beneficiary.
In recent weeks, the pound has been buoyed by the UK's rapid vaccine rollout, making sterling one of the best performing majors this year. But analysts say there’s a risk it could fallback thanks to growing anger amongst Eurozone member states with the bloc's notably slower vaccination rollout.
Lack of vaccine supply from British-Swedish pharma AstraZeneca is to blame, they say, and moves are afoot to restrict vaccine exports to the UK in order to shore up supply in the EU. Countries like France and Germany, as well as the European Commission, have all called in recent weeks to block the export of the vaccines to the UK.
Those calls grew louder this week amid press reports that this week’s European Council meeting will debate a UK export block. EU politicians have so far stepped back from a formal ban, which would add to existing UK concerns about the stability of vaccine supply and warnings from Britain's NHS that April could see shortages.
Westminster is working hard to dissuade EU member states from taking any action to restrict UK imports of the vaccine. Irish Taoiseach Micheál Martin told journalists this week he is against any EU export ban on Covid-19 vaccines, calling any such move ‘retrograde’ and unhelpful.
If a ban does happen, it would likely slow down the UK's vaccination programme, at least to some extent. In forex markets, that kind of uncertainty could leave the pound exposed.
The pound-to-euro exchange rate climbed as high as 1.1716 last week, but traders seem unwilling to break through to new one-year highs beyond it.
Pitted against the euro, analysts say sterling looks well supported, with only shallow pullbacks seen this week. It’s up against the greenback where the pound’s weakness is most apparent. Sterling-to-dollar exchange rates went as high as 1.41 at the end of February. In March, however, they slid back to the 1.38-ish range markets are currently seeing.
Analysts also say the euro could fall victim to dollar strength, as the bloc very publicly struggles to keep pace with either the US or UK in terms of vaccinating its population.
A forex briefing from Barclays said that near-term divergent vaccination and infection trajectories could briefly test the idea of economic recovery attached to vaccination programme success. Across much of the Eurozone, the pace of vaccine rollout has been tepid, and new cases are on the rise.
Barclays says the EU’s problems extend beyond supply worries. There been hesitancy by EU citizens to take up the AstraZeneca vaccine. EU member states have managed their national rollouts chaotically, and this will be a much more significant factor indenting the continent’s vaccination campaign.
In March, several EU states suspended use of the AstraZeneca vaccine; off the back of reports that it could cause blood clots in some patients. The European Medicines Agency had to re-enforce its stance that the vaccine is safe, which has seen some EU countries begin to allow its use again.
Surveys, however, show that many still Europeans see the AstraZeneca vaccine as unsafe, citing conflicting messages from governments and the media.
A survey by YouGov found that a majority of Germans think the vaccine is unsafe (56 per cent), and just a third think it’s safe to use (33 per cent).
In France, more than 60 per cent said they believed the AZ vaccine to be unsafe, and just 25 per cent think it's safe.
In Spain and Italy, previous surveys found that people had believed the AstraZeneca vaccine was safe (58 per cent and 55 per cent, respectively). Since then, vaccine scepticism has risen sharply. Around just 37 per cent of Italians and Spaniards now say they think the vaccine is safe to use
In a note to investors, Barclays noted the role that ‘social capital’ (e.g. trust in institutions and opinions shared within personal networks) is playing in terms of forecasting likely economic activity after lockdowns begin to ease. Lack of confidence in governments means people are making choices independent of the authorities. That trend will determine the extent of recoveries.
For now, at least, Barclays is telling its clients that its view on the euro remains bearish. The bank has lowered its euro-area growth forecast for 2022, Barclay’s says, which implies that the euro area will still have an output gap. Underlying inflation will stay below the European Central Bank’s target.
While the Eurozone and UK arm-wrestle over vaccine supplies, the vaccination programme is pushing forward in America will no supply worries.
A big stimulus package recently approved by the federal government is expected to speed up economic activity. There may also be more government relief to come, all of which is adding feel-good factor to dollar markets.
Analysts at Bank of America expect Washington to move forward with an infrastructure stimulus package now that the inoculation rollout is hitting or exceeding targets.
With more fiscal stimulus in the pipeline, President Biden will likely outline infrastructure spending plans in his speech to Congress in April. BoA says the estimated USD two trillion plan could push the level of 10-year yields up by 30-50 basis points in a year’s time.
The net result of all this activity on foreign exchange markets is forecast to result in more dollar strength.
‘The outcome will rely on the size of the infrastructure plan, on how quickly it is implemented, and in terms of how the market expects the Federal Reserve to react to it. With brighter US growth prospects and higher bond yields, there should be a wave of support that will keep USD rising,’ says BoA.