Oliver Mangan: Euro at 87p looks to speed of vaccine rollouts

Sterling appreciated steadily during the opening quarter of 2021, mainly due to the rapid rollout of Covid-19 vaccines in the UK – but other countries are beginning to catch up

Mon, 19 Apr, 2021 - 15:00

Oliver Mangan

The opening quarter of 2021 saw quite a bit of movement on currency markets, with the dollar and sterling strengthening and the euro and the yen losing ground. In April, those trends have reversed somewhat, leaving it difficult to call the future direction of the main currency pairs.

It was generally expected that having lost ground in 2020, the dollar would continue to move lower in 2021. The currency, though, rallied during the first quarter, helped by a marked rise in long-term US interest rates and big upgrades to US growth forecasts for 2021 and 2022.

This saw the euro drop back to a low of $1.17 by the end of March from $1.23 in January. The market was also very short of the US currency, which helped the dollar recover as these positions were closed out.

Sterling, meanwhile, appreciated steadily during the opening quarter of 2021, most notably against the euro and yen. This may have been partially due to the trade deal concluded at the end of December between the EU and UK, which avoided a hard Brexit.

A key factor, though, seems to have been the rapid rollout of Covid vaccines in the UK. Restrictions on activity there should thus be eased significantly over the next few months, allowing a sharp economic rebound.

The improved growth outlook has seen upgrades to forecasts for the UK economy. As a result, markets have moved from, at the start of the year pricing in a move to negative interest rates in the UK, to now expecting that rates there will start to rise from the third quarter of next year. This has seen a marked jump in UK bond yields during quarter one.

Stronger growth outlook

The stronger growth outlook and hardening interest rate expectations have propelled sterling higher. The euro fell steadily from around 90 pence at the start of the year to 85 pence by early April.

Meantime, sterling climbed to a high of $1.42 against the dollar, before settling down just below the $1.40 level.

So far in April, though, the euro has recovered to near 87 pence against sterling and close to $1.20 against the dollar as the upward pressure on long-term rates has abated recently.

The US and UK also raced ahead in terms of the rollout of Covid vaccinations in early 2021, but other countries are now beginning to catch up.

Market positioning has also changed. It began the year very short the dollar, but markets have moved to a neutral position on the US currency.

The correction seen to date in April may herald a period of range trading ahead for the main euro currency pairs, especially with central banks indicating that official interest rates are likely to remain unchanged for a considerable period of time.

Therefore, we could see the action in euro contained in the $1.17-$1.23 range through the summer. The market is quite long on sterling, so its rally may have run its course.