Euro Zone News

Surging British Optimism Could Offer Pound Sterling Upside against a Pessimistic Euro

– Biggest surge in UK economic optimism since 1978
– YouGov shows Brits far more optimistic than EU counterparts
– Potential for economic outperformance grows
– Economic outperformance could aid GBP

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Strong consumer and business optimism is a potent driver of economic growth and new polling out this week shows the UK now has this key ingredient of growth in abundance, which could in turn underpin the British Pound’s current trend of outperformance.

Growing optimism about the future could fuel a strong recovery in UK consumption and business investment allowing the economy to fully recover its covid-19 crisis decline by the end of 2021, which is a lot sooner than major forecasters are expecting.

According to a YouGov poll, Britons are now much more optimistic about the Covid-19 situation than their counterparts in other European countries, while a separate poll from Ipsos MORI out on Monday reveals Britain has experienced a surge in economic optimism.

Optimism is being generated by the country’s rapid vaccine rollout which promises a sustainable and irreversible opening of the economy, which understandably allows for consumers and businesses to plan with confidence.

Ipsos MORI’s latest Political Monitor reveals 43% of Britons think the economy will improve over the next 12 months (up 14 points from last month), 14% say it will stay the same (up 5), while 41% think it will get worse (down 19), giving an Economic Optimism Index score of +2 (compared with -31 in February).

This is the most optimistic the British public have been on the economy since 2015 and the largest month-on-month improvement (a swing of 16.5 points) since Ipsos MORI polling on the matter began in 1978.

Economic optimism recovers

90% of those polled said the government has done a good job on vaccinating the public quickly.

Bank of England Governor Andrew Bailey said on Monday that the UK’s economic prospects are improving as a result of the successful vaccine programme and the economy could perform more strongly than expected over the coming months.

In a BBC Radio Four interview Bailey said that he now saw “upside risks” to the Bank’s growth forecasts, a development that foreign exchange analysts say is supportive of further gains in the Pound.

Bailey said the economy could now recover to pre-crisis levels by the end of the year.

The UK economy will be boosted by a sizeable jump in consumer spending in 2021 as pent-up savings are unwound according to economists at Deutsche Bank, who also warn that the Bank of England might be underestimating the scale of an impending consumer-lead rebound.

Analysis from Deutsche Bank released last week shows that the scale of the boost to UK economic growth from the spending of savings could amount to an additional 1.0% of GDP, more than twice that expected by the Bank of England.

An unexpectedly strong economic rebound could in turn drive inflation meaningfully above the Bank of England’s 2.0% target, raising market expectations for future interest rate rises and underpinning the Pound.

Separate YouGov polling meanwhile showed that Britons are overwhelmingly of the view that “the national coronavirus situation to be getting better/completely over”, as reflected in the below findings:

Covid outlook is improving UK

Image courtesy of YouGov

The stark contrast in optimism between the UK and Eurozone countries could potentially have a direct bearing on the Pound-to-Euro exchange rate’s fortunes, provided it is reflected in relative economic performances.

Optimism in the Eurozone will likely have taken a further significant knock on news out Monday that more European countries have banned the AstraZeneca/Oxford University vaccine, which was expected to be the backbone for the bloc’s vaccine rollout through the early part of 2021.

France and Italy on Monday joined Germany in suspending the AstraZeneca jab over blood clot fears, saying the move was precautionary.

The Paul Ehrlich Institute advised the German Government to suspend the vaccine until further investigations of reported cases of clotting in recipients of the vaccine had been conducted.

French President Emmanuel Macron said his country would suspend shots at least until Tuesday afternoon, when the European Medicines Agency will issue its recommendation over the vaccine.

The EMA has so far said there is no causal link between the vaccine and clots and has recommended countries continue to use the vaccine. In a statement released late Monday the EMA reaffirmed its view saying: “The number of thromboembolic events overall in vaccinated people seems not to be higher than that seen in the general population. EMA currently remains of the view that the benefits of the AZ vaccine outweigh the risks of side effects.”

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Meanwhile, Italy’s Pharmaceuticals Agency merely followed its neighbours and said the decision to ban the vaccine “was taken in line with similar measures adopted by other European countries.”

“With Italy facing another wave of infection now really isn’t the time to reduce the vaccine options available to European populations, and the prospect of an extended crisis in Europe even as the UK and US move fully into the recovery stage threatens to undo much of the rally in European markets of recent months,” says Chris Beauchamp, Chief Market Analyst at IG.

“The EU’s inability to construct an effective vaccine policy months ago continues to haunt it, with the latest decision appearing to arise from an overreaction to isolated incidences,” he adds.

AstraZeneca has said that with over 17 million now vaccinated with its jab it has the evidence required to state the vaccine does not cause blood clotting.

Public Health England, which has the most comprehensive real-world data set pertaining to AstraZeneca vaccinations of any country, has said there is no reason to doubt the vaccine’s safety.

For the Eurozone, the developments could not have come at a worse time and risk putting the region into the slow lane in the race back to economic normality.

Under such a divergence, the Euro exchange rate complex is tipped to underperform.

“The suspension in certain countries in Europe of using the Astra Zeneca vaccine will inevitably have consequences for speeding up the vaccination roll-out which will see investors push back the timing and extent of euro-zone economic recovery,” says Derek Halpenny, Head of Research at MUFG in London.

MUFG have this week recommended selling the Euro, in part because of the Eurozone’s struggling vaccination programme which is likely to weigh on economic output.

“We unfortunately have to repeat that the sluggish pace of vaccination continues to jeopardise the recovery in the eurozone,” says Peter Vanden Houte, Chief Economist, Belgium, Luxembourg at ING Bank N.V.

As of March 13 the UK had vaccinated 37% of its population with at least one dose, the United States 31%, the European Union 11%.

Even before the latest setback on supplies, the Eurozone was struggling says Houte:

“The vaccination process also needs an urgent makeover in many countries if herd immunity is to be reached over the course of this year. This also explains why most eurozone countries have already announced that they will keep lockdown measures in place at least until the second half of March and probably even longer.”

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