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Vaccination frenzy: Why the British pound is currently overvalued

Successes in the vaccination campaign mask the country's problems. After a strong appreciation of the currency, a countermovement threatens. By Thomas Strohm, Euro am Sonntag

While many countries such as Germany are complaining about vaccination campaigns that have got off to a slow start, there are constant reports of success from Great Britain on the progress of the corona vaccinations. As a result, the pound has appreciated significantly against other currencies such as the euro since the beginning of the year.

It is sometimes forgotten that the United Kingdom is one of the countries hardest hit by the pandemic and that the economy will be massively affected by lockdown and Brexit. Most currency analysts therefore expect the pound to depreciate over the next few months, and some experts even anticipate a violent countermovement following the recent gains.

Relapse into recession

"The market is currently completely hiding economic realities," explains Sonja Marten, Head of Foreign Exchange Research at DZ Bank. Regardless of the successful vaccination campaign, Great Britain will initially fall into another recession and then not recover dynamically in the current year, in contrast to the EU or the USA, for example. "We are sticking to our assessment that the pound is significantly overvalued at current rates," says Marten. DZ Bank expects UK GDP to grow by just two percent in 2021 and not until 2022 will it see a more pronounced recovery. For comparison: The growth forecast for the euro zone for 2021 is 3.7 percent, for the USA it is six percent. Although London and Brussels agreed on a free trade agreement at the last minute at the end of 2020, there have been numerous trade barriers since the beginning of the year. "We assume that the very weak economic data we expected for the first quarter will bring the market back down to earth," says Marten.

Analysts expect devaluation

In the middle of the week, at times only 0.87 pounds had to be paid for one euro. By consensus, the foreign exchange analysts expect a depreciation to 0.89 pounds over the next six months. The experts at DZ Bank anticipate much more substantial losses and exchange rates of 0.92 pounds in six and 0.95 pounds per euro in twelve months.

Investors who want to bet on a pound that is weaker against the euro can use a knock-out certificate from Goldman Sachs (ISIN: DE 000 GB4 9SL 6), which tracks the exchange rate development with a leverage of currently 3.8. If, contrary to expectations, the pound should continue to gain in value, there will be correspondingly large losses. The barrier that threatens total loss is currently around 26 percent away.