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Pound Sterling Tipped to Remain Supported as July 19 Exit Receives Green Light

- July 19 'freedom day' likely to go ahead
- Pandemic no longer threat to GBP: Barclays
- "Hopefully the nightmare is coming to an end"

Johnson freedom day announcement

Picture by Andrew Parsons / No 10 Downing Street

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The British Pound is tipped by analysts to remain supported amidst expectations for a continued recovery of the UK economy, underpinned by the removal of all Covid-related restrictions by July 19.

The UK Prime Minister Boris Johnson confirmed Monday in a press briefing held at 10 Downing Street that the final unlocking of the UK will likely proceed on July 19, subject to final approval on July 12.

"Sterling bulls hope British Prime Minister Boris Johnson's new laissez-faire approach to the COVID-19 pandemic prompts another period of GBP outperformance against major currencies," says Robert Howard, a Reuters market analyst.

Johnson said the decision to proceed with a full unlocking of the economy as vaccines had broken the link between infections, hospitalisations and deaths.

"If we can't reopen society in the next few weeks... then we must ask ourselves when will we be able to return to normal," said Johnson.

The lifting of all restrictions removes any remaining constraints placed on businesses and allows the economy to return to pre-covid levels sooner. Any subsequent benefits to business and consumer confidence would also to a degree be expected to aid the economic recovery, which is in turn largely supportive of the Pound.

"In the coming week, GBP will likely stabilize around 1.38 with symmetric risks. We do not share many market participants’ concerns about the Delta variant of the COVID virus, since this variant has not led to a surge in hospitalization numbers and it clearly largely affects the younger, less vaccinated, population. This suggests that vaccination is effective and the Delta variant should not cause an excessive burden for the NHS," says Marek Raczko, an analyst with Barclays.

Pound performance against the Euro and Dollar

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The Pound-to-Euro exchange rate rose to a two-week high at 1.17 in the hours following the Prime Minister's briefing, meanwhile the Pound-to-Dollar exchange rate built on support located at 1.3750 and rose to a one-week high just short of 1.39.

"We think the backdrop remains favourable for further GBP outperformance for the rest of the year," says Kamal Sharm, a strategist with Bank of America.

The final phase of reopening means all businesses will be permitted to reopen, no more limits to numbers visiting private residences, an end the one-metre plus rule and the ending of the legal requirement to wear a face covering.

The only reason the UK can contemplate further unlocking is the continuing effectiveness of the vaccines, said Johnson.

Building on this observation, Johnson said by July 19 every adult would have had the chance to receive a first dose and two thirds a second dose.

And in order to further improve the country's vaccine defences the dosing for those under 40 would be shortened from 12 to 8 weeks.

UK covid deaths and cases

Above: UK Covid cases (black) vs. deaths (red). Image courtesy of NBF Economics. 

"Countries with the highest vaccinations rates are seeing sharp declines in hospitalisations, enabling governments to re-open economies – witness the largely mask-less crowd that thronged Wimbledon this week in the UK," says Rajat Bhattacharya, Senior Investment Strategist at Standard Chartered.

Standard Chartered tell their Wealth Management clients they anticipate the UK to reach 'herd immunity' from the Covid virus by the third quarter and anticipate a consumption-lead boost to the economy.

Reacting to the government's signposting that all restrictions would be removed in two weeks time, small businesses expressed relief.

"Freedom Day and football coming home in the same month. What a result that would be. I'm especially pleased for businesses in the hospitality, events and entertainment industries, which have been hit disproportionately hard since March of last year. Hopefully the nightmare is coming to an end," says Paul Neal, an independent mortgage broker at Derbyshire-based Missing Element Mortgage Services.

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The UK economy will be in focus on Friday July 09 when GDP data for May is released, with strategists saying a better-than-expected reading might help the Pound.

"The UK economy has had a remarkably good run over recent weeks. The recent reopenings and vaccine-boosted confidence will likely drive GDP growth of over 5% in the second quarter. But Covid-19 cases are rising quickly again, and are showing few signs of slowing," says James Smith, Developed Markets Economist at ING.

Smith notes that the reproduction 'R' rate has crept higher again as cases begin to rise more rapidly outside of the youngest age groups. The good - and somewhat surprising - news is that hospitalisations have been remarkably low, further proof that the vaccines are working well.

Covid hospitalisations

Image courtesy of ING.

Economists do however caution that while the UK economy has recovered sharply in 2021 short-term data points are indicating that the rate of growth might have plateaued, opening the door for potentially disappointing data releases.

"April GDP likely marked peak growth in the UK's post winter lockdown recovery. Activity growth is expected to slow, and we expect the ONS to confirm this on Friday with May GDP growth nearly halving. To be sure, we are one step closer to reaching steady-state growth.," says Sanjay Raja, Senior Economist at Deutsche Bank.

DB Nowcast

Image courtesy of Deutsche Bank

Any disappointment in the data could trigger bouts of weakness in the Pound, particularly given the foreign exchange market's current sensitivity to data releases.

"We believe that GBP will have to rely on more than just a pricing out of risk premium for the rest of year. Fortunately for the pound, the investment flow backdrop continues to be supportive," says Sharma.

But should all restrictions be finally lifted on July 19, as is currently the expectation, the economy could find a fresh impulse of energy that could rejuvenate the recovery, and ultimately, the Pound.

"With restrictions easing further, we see another jump in activity. Our nowcast models point to May GDP expanding by 1.3% m-o-m with risks tilted marginally to the upside," says Raja.

DB nowcast 2

Image courtesy of Deutsche Bank

Finally, a small dose of caution from Robert Howard at Reuters: "Events will dictate how GBP performs beyond July 19 – and the pound could weaken if COVID-19 restrictions are reintroduced in the autumn. Curbs were tightened across Britain last September before a second lockdown in November, after being loosened last summer."