Sterling Pound steals the show in 2021, so far!

Sterling Pound has been quite on an uptrend since the middle of 2020 despite the grievous hit by Coronavirus to the world economy including United Kingdom. Since March 2020 up till now, British Pound-US Dollar (GBPUSD) has surged by more than 20 per cent. The currency started off 2020 at 1.3259 levels and thereafter, plunged towards 1.1404 levels in March 2020. From thereon, the movement in Pound has been mostly towards the north. It touched the higher levels of 1.4061 levels in February 2021. 

A similar trend has been witnessed in British Pound-Indian Rupees (GBPINR) as well. The currency started off the year 2020 at 94.60 levels and from thereon, it has moved only higher with a few obstructions in between. Currently, the pair is trading at 103.967 levels as of April 29, 2021. The movement in both the pair is quite surprising, considering how the pandemic blew off the UK economy due to the growing number of cases, which brought successive measures of social distancing, lockdowns, and restrictions by the government. As a consequence, the economy has taken a sudden and dramatic hit, perhaps even more severe than the global financial crisis of 2009. 

As per reports, the UK’s GDP measured by the output approach declined by 9.1 per cent in 2020, following a growth of 1.4 per cent in 2019. The fall in 2020 was more than twice the next largest fall of 4.0 per cent in 2009. Also, production, manufacturing & construction experienced similar kinds of falls. Production plunged 7.8 per cent in 2009 and 8.6 per cent in 2020 while manufacturing tumbled 8.6 per cent in 2009 and 9.9 per cent in 2020. On the contrary, construction performed better in 2020. It fell by 12.5 per cent compared with a 13.2 per cent decrease in 2009. 

The worst fall was seen in the service industry, which fell by 8.9 per cent in 2020 after rising by 1.8 per cent in 2019 as against a 2.5 per cent decline in 2009. Accommodation & food services were hit hardest, falling by 44.0 per cent. On the contrary, chemicals & chemical products displayed the largest improvement in the performance during 2020 in comparison to 2009. 

Despite the above mess, Sterling Pound was enjoying its ride towards the north. The prime reason for its strength was the weakness seen in the US Dollar index on low-interest rates and historic government stimulus to support the economy during the COVID-19 pandemic. At the same time, Sterling Pound has been gaining value as the Brexit process provided more certainty to businesses. In addition to this, the vaccine rollout against COVID-19 in Britain had proceeded faster than in other countries, which added more strength to the already strengthened currency.  

The relatively high vaccination rate has led to businesses re-open in the UK. In fact, the country’s government has outlined plans to return to full economic activity by the end of June as the infection rate has dropped sharply. Due to the easing of business restrictions, many of the economic indicators have revived, giving a positive future economic outlook of Britain. This means that the prospect of Bank of England adopting negative interest rates in the near term could recede. This analogy too supported the value of the pound. 

Though the immediate trend of Sterling Pound looks positive, one should not forget the macro picture. The flow of trade between the UK and the European Union is a cause of concern as trade costs are rising because of delayed deliveries and increased bureaucracy. This could weaken the trade relationship between the two affecting economic growth. There is also continued uncertainty surrounding the relationship between the two when it comes to services, as the trade agreement reached at the end of 2020, only covers goods. It is the financial services sector that drives the growth of the UK economy. Also, there was news of the EU commencing legal action against the UK as the latter breached some parts of the Northern Ireland protocol. A lack of agreement could pull back the value of Sterling. 

In conclusion, the near-term outlook for both GBPUSD and GBPINR pair looks positive. There is a possibility that both the pairs may move towards 1.4100 (GBPUSD CMP: 1.3945) and 105.20 (GBPINR CMP: 103.38) levels, respectively in some weeks on the back of expectations that the pandemic will end soon, bringing normalcy along with flows into the UK’s financial assets. However, the consequences of Brexit along with the upcoming elections could weigh on the pound’s limiting gains. 

Author of the article is Heena Naik, Research Analyst - Currency, Angel Broking Limited.