28 Jul 2021

Sterling finds its footing as Covid mountain shrinks

Demitri Theodosiou

Head of FX and Interest Rates Trading

In the latest instalment of our “Thoughts of an FX Trader” article series, Head of FX and Interest Rates Trading Demitri Theodosiou examines whether the pound’s recent rally amid falling Covid cases will continue.

My wife is from the incredibly picturesque state of Tyrol in western Austria, famed in winter for its Alpine ski resorts. I remember early in our courtship travelling across to meet her parents, staying at their house in a small village near Innsbruck. During that trip, in between eating and drinking copious amounts of local food and wine, my wife suggested we go sledging. This involved dragging the sledge up a pretty steep mountainside on a very slippery snowy surface with the sun blazing down on us. Halfway up, pulling this heavy wooden sledge, I felt the fatigue and started to think nothing was worth this level of effort. However, after a few hours, we reached the top and I was treated to three things that made it worthwhile – a fantastic view across Innsbruck; a restaurant where I could enjoy even more local food and alcohol; and an exhilarating, if not slightly dangerous, sledging experience back down the mountain.

It’s with this image of a long trek up a steep mountain in mind that I was pleasantly surprised to see the latest statistics on Covid cases yesterday. After spending most of this year in lockdown, and in recent weeks suffering a growing number of Covid infections from the Delta variant, Tuesday saw the seventh consecutive day of marked declines in UK daily cases, with 23,511 new infections recorded, less than half the recent peak of 54,674 just 10 days earlier. This sharp decline has come as a surprise to both scientists and policymakers, with the UK’s Professor Neil Ferguson previously warning that a rate of 100,000 daily Covid cases was almost inevitable. Although this possibility still cannot be ruled out, the downtrend in cases is undoubtedly a positive development. With this news, the pound has recovered from trading below $1.36 last week, near its 2021 low, to almost touch $1.39.

There is a growing sense of potential strength to come and an acknowledgement that if the last 18 months have taught us anything, it is to expect the unexpected.

Many have struggled with the implications of the Covid pandemic, feeling the fatigue as we drag this heavy burden up a steep mountainside. The question on the lips of all investors is: “When will we reach the summit, be able to take in the views of a more normal life, and race towards economic prosperity on the figurative sledge of fiscal and monetary support?” There is cause for cautious optimism as the UK vaccine program starts to reach the latter stages of its rollout - that the protection it affords may help us get to the top of the mountain.

One would expect the pound to move higher in such a world, especially after being out of favour for so many years due to Brexit uncertainty, and with safe-haven US dollar buying likely to dissipate. For now, though, sterling sits trading near the lower end of its range this year against the US dollar, but there is a growing sense of potential strength to come and an acknowledgement that if the last 18 months have taught us anything, it is to expect the unexpected.

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