- British Pound "upside risks are clear" - MUFG

- Window for negative rates at BoE has closed

- UK vaccination programme to underpin economic rebound

Above: The Prime Minister visit's SureScreen Diagnostics in Derby, Feb 08. Picture by Andrew Parsons / No 10 Downing Street

Market rates at publication: GBP/EUR: 1.1414 | GBP/USD: 1.3780Bank transfer rates: 1.1194 | 1.3495Specialist transfer rates: 1.1334 | 1.3685More about bank-beating exchange rates, hereExpect "further GBP upside" say analysts at a leading global commercial lender and investment bank, who have told clients the UK economic rebound from the covid-19 crisis will likely eclipse that of other advanced economies.

In a regular currency briefing note released on Feb. 08, MUFG says the UK's vaccination programme will unlock a significant consumer spending rebound which will likely surprise even the optimistic growth forecasts made by the Bank of England (BoE).

"Due to the progress on vaccine roll-out the BoE now projects GDP growth from Q2 2021 to Q1 2022 of 14.2%, up from 10% in November. We believe there may be upside risks to this projection," says Derek Halpenny, Head of Research of at MUFG.

The Pound has rallied in 2021 on a combination of an EU-UK trade deal agreement being agreed in late December, rising stock markets and a view the country's vaccination programme will deliver a strong economic rebound.

These developments combine to lower the odds of the BoE cutting interest rates again, which is said by foreign exchange analysts to be supportive for Sterling.

Above: GBP/EUR has rallied in 2021 and now eyes the spring 2020 highs.

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The British Pound rallied to new 8-month highs against the Euro and put in sizeable gains against nearly all of the world's major currencies on Feb 04 after the Bank of England kept interest rates unchanged and signalled that a rate cut over coming months was now unlikely.

Money market pricing showed expectations for a rate cut at least once in 2021 and the market's subsequent change of mind was reflected in higher overnight swap rates and a stronger Pound.

"The conclusions on negative rates was not hugely surprising although perhaps the timing of when negative rates could plausibly be used – August – was a little further out than expected and therefore the conclusion can more confidently be that the window for negative rates has closed in this economic cycle," says Halpenny.

Underpinning the Bank's thinking on interest rates is an expectation for a strong economic rebound to occur in 2021, starting in the spring.

In a weekend interview with the Observer newspaper, Bank of England Governor Andrew Bailey said the UK was set for a post-Covid spending binge, as money saved during the pandemic is put to work.

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But, the assumptions made by the Bank's economists could be too cautious, according to MUFG.

"The Bank of England assumes only 5% of total accumulated savings are run down – that could be conservative," says Halpenny.

"While the government message is one of caution, the scale of vaccinations will drive a more robust rebound," he adds.

At the current time the UK is close to having vaccinated 20% of its adult population with a first dose of covid-19 vaccine, which is well ahead of the 3.70% of the population reached in the European Union.

Above: Divergence grows between the UK and European countries in terms of the pace of the covid vaccine rollout.

"Importantly, 75% of all COVID deaths in the UK were aged over 75 and the government has now vaccinated well over 80% in that age bracket," says Halpenny. "Within weeks we are likely to see a dramatic fall in hospitalisations and deaths from COVID."

The overall infection rate in the UK meanwhile continues to fall sharply and are now 69% down on their peak with hospitalisation rates moving down in response.

Above: UK cases have dropped 69% from their peak. Image courtesy of Pantheon Macroeconomics.

"U.K. cases, hospitalisations and deaths continue to fall rapidly. Hospitalisations are dropping more quickly, relative to cases, than in the short-lived downturn triggered by the "lockdown-lite" in November. This probably is a consequence of the strategy of giving first shots to the people most likely to be hospitalised by Covid; more than 83% of people over 75 have now had at least one shot," says Ian Shepherdson, Chief Economist at Pantheon Macroeconomics.

The UK government does however maintain a cautious approach in communicating how it intends to unlock the economy as part of a strategy to ensure that this is the final lockdown, which could be compromised by moving too soon to ease restrictions.

A sustainable unlocking of the economy could pay dividends for the Pound as investors and consumers respond confidently to post-covid crisis future.

"The markets may be under-estimating the scale of improvement that appears around the corner that will notably lift investor confidence. We see the BoE updated information and the continued vaccination roll-outs as strengthening the case for further GBP upside over the short-term," says Halpenny.

MUFG maintain a trade idea that sees investors position for further upside in Pound Sterling by buying the GBP/USD exchange rate.

They are targeting a rise to 1.4125.

At the time of writing the Pound-to-Dollar exchange rate is quoted at 1.3730, the Pound-to-Euro exchange rate is at 1.1405.