Next Big Trade for Pound Bulls Is All About EU Vaccine Disparity

(Bloomberg) -- With Brexit agreed, currency traders betting on a rally in sterling are seizing on the next big divide between the U.K. and the European Union: vaccine rollouts.

Britain has immunized around five times as many people as a proportion of its population than the European Union, a divergence that helped drive the U.K currency to an eight-month high versus the euro in the past week. It’s one of the reasons why sterling will continue to outperform, according to James Athey, an investment director at Aberdeen Standard Investments in London.

He predicts the pound will rally to 70 pence against the common currency in the next few years, about a 20% advance, and a level last seen before Britain voted to leave the EU in 2016. “Our vaccine rollout is going better than almost everyone else,” Athey said, adding that sterling is currently “very cheap.”

Battered by Brexit and bruised by the deepest recession in Europe, the pound is now making a comeback on optimism the economy will find its footing faster than peers. While the financial pain on the continent has so far been less severe, speculation is that the bloc will be slower to exit crippling lockdowns given the vaccine rollouts there are lagging.

Years of uncertainty over the U.K.’s bid to leave the European Union have weighed on the pound, sending it to the weakest level against the euro in over a decade in March, and the lowest in over three decades against the dollar. Sterling rallied after the terms of its divorce from the bloc were finally agreed late last year.

Data released Friday showed the U.K’s pre-eminent services sector contracted sharply in January as nationwide restrictions imposed last month hurt retailers. And while infection rates in England fell for the first time in a month, the government hasn’t ruled out extending a third lockdown into the summer.

Still, Britain has so far innoculated eight out of every 100 people, compared with just over 1.5 in the EU, according to data tracked by Bloomberg, and it’s helping investors look past the headwinds.

“The U.K. has started to impress with the vaccine rollout,” said Jordan Rochester, a foreign-exchange strategist at Nomura International, who sees the pound rallying both against the euro and the dollar. “The ‘under-promise but over deliver’ seems to be credible if they indeed get adults vaccinated by summer.”

A key gauge of market sentiment is also moving in sterling’s favor. Three-month risk reversals show investors are the least positive on the euro relative to the pound since before the first wave of lockdowns in March. In the spot market, the pound was trading around 89 pence per euro.

The Bank of England could also help prop up sterling, according to Russell Silberston, an investment strategist at asset manager Ninety One Plc. Governor Andrew Bailey recently signaled again that while the central bank is reviewing the possibility of using negative interest rates, it hasn’t yet started discussing whether to deploy them.

“The vaccine is a game changer -- so those that have been hard hit have a clear path out,” said Silberston, who currently has a neutral stance on the pound. “We want to see if the hope is followed through by actual data.”