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Sterling withstood recession from COVID-19 and Brexit

The pound sterling has been hit by two storms of fear in recent years in the form of a recession due to COVID-19 and Brexit. But thanks to the deal with the European Union and rapid vaccination, sterling soared above $1.4 for the first time since April 2018. If at the beginning of 2020 speculators were neutral about it, then by mid-February, they are increasingly betting on the strengthening of the sterling. NatWest Markets believes that good news in the near future may lead to a continuation of the GBP/USD rally in the direction of 1.45, and Equiti Capital expects that if things go as they did at the beginning of the year, the pair will be able to approach its maximum before the 2016 referendum by the end of December.

When investors ignore the negative and buy the currency on the positive side, bulls dominate the market. In this regard, the stability of the pound after the release of disappointing retail sales statistics for January (the indicator dipped 8.2% m/m, which is the second-worst collapse after -18% in April last year and suggests that the current lockdown is only good in one thing - it is better than the previous one), and its growth in response to strong statistics on business activity indicates that the potential for a rally in GBP/USD is far from over. The index of purchasing managers in the manufacturing sector of Britain increased in February from 54.1 to 54.9, and in the service sector from 39.5 to 49.7.

In fact, investors turn a blind eye to the sad fourth quarter and a bad January and are seriously counting on the rapid growth of UK GDP thanks to rapid vaccination. London has managed to implement an ambitious plan to provide vaccines to 15 million people until mid-February, and now Britain is second only to Israel and the UAE in terms of the number of doses per 100 people among countries with a population of more than 1 million. This circumstance allows counting on the imminent lifting of restrictions and the rapid growth of the British economy in the second quarter.

Dynamics of vaccine doses per 100 population

Sterling withstood recession from COVID-19 and Brexit

Boris Johnson will talk in detail about how London officials are going to do this. The Prime Minister has already announced the opening of schools from March 8, now bars, restaurants, and other businesses await clarifications. The pound is supported by the expectations of the prolongation of the financial assistance programs, which will most likely be announced by the British finance minister Rishi Sunak in early March.

Thus, sterling is growing against the euro due to faster vaccinations in the UK compared to the EU, and against the US dollar due to the global risk appetite. The British economy is open, so a global economic recovery will be good news for its currency. Although, according to MUFG, looking at the GBP/USD rally at 10% of the September bottom, it can be assumed that there is a lot of positive in the pair's quotes, so bad news can provoke profit-taking by speculators and a serious correction.

Technically, the GBP/USD weekly chart has a Shark pattern with targets at 88.6% and 113%. The first one corresponds to 1.414, the second - 1.472. The recommendation remains the same - to buy the pound against the US dollar on pullbacks.

GBP/USD, weekly chart

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Sterling withstood recession from COVID-19 and Brexit

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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