(Bloomberg) — Traders the world over are turning their eyes to the U.K and its currency to see how resistant the developed world will be to highly-transmissible virus variants.

As the world’s first major economy where the delta strain meets a widely-vaccinated population, Britain offers a roadmap for currency traders trying to navigate lingering Covid.

The pound took a drubbing in recent weeks on a decision to postpone economic reopening, and the currency’s path after “Freedom Day” — when restrictions end on July 19 — is stirring debate. The median call in a Bloomberg survey of strategists is for sterling to end the year a bit stronger at $1.42 versus a level of around $1.38 Friday.

“The variant definitely raises questions — we knew it wasn’t going to be a straight line up, we knew it wasn’t going to be so simple,” said Esty Dwek, head of global market strategy at Natixis. “I do believe the U.K. will muddle through, even though it’s a cautionary tale around Covid and variants.”

While Covid cases are at their highest since January, rates of hospitalizations and deaths are contained, and that’s delivered tangible proof that vaccines are working. About half the U.K.’s population is fully vaccinated, according to Bloomberg’s Vaccine Tracker.

Still, there’s usually a lag between data on cases, hospitalizations, and deaths, so the next few weeks will be crucial.

The delta variant has spread to almost 100 countries since it was first reported in India in October, and will likely become the dominant virus strain over the coming months, according to the World Health Organization.

Even Israel, which has also achieved wide-scale success on vaccinations, hasn’t been able to fend off the delta variant. A spike in cases has seen the country postpone the reopening of its borders to foreign tourists until August and reintroduce more stringent quarantine regulations.

The risk to currency markets is that the spread of more-contagious variants might lead to postponed policy normalization. That could upend bets on countries with central banks seen as most likely to deliver early rate increases, like the Bank of England.

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It might “shake some central banks’ conviction to exit their expansionary policy” said Antje Praefcke, FX analyst at Commerzbank AG. A slower unwind by the BOE “would mean that times could remain difficult for the pound,” he said.

Traders have been expecting the BOE to be near the front of the pack as central banks around the world move toward reversing the emergency bond-purchase programs and interest-rate cuts enacted during the height of the coronavirus crisis. Now, that key support for the pound could be fading.

Governor Andrew Bailey this week pushed back on speculation that he’ll soon move to tighten monetary policy. Money markets pared BOE rate hike bets after Bailey’s remarks. A 15 basis-point rise is expected by August next year, a drop of 7 basis points compared to the end of last month.

No matter how policy makers and the pound ultimately react to virus developments, investors aren’t anticipating any sudden moves. Volatility for the currency is expected to remain low in July.

“We should have a clearer idea in a few weeks,” said Mike Riddell, a money manager at Allianz Global Investors in London who is “moderately underweight” on the pound. “At that stage, we’ll also have a better idea what’s happening to hospitalizations in other countries.”

‘Very Cheap’

For others, speculation is mounting that the BOE has reached the limits of its ultra-loose policy as growth comes roaring back, making the pound a screaming buy.

Nomura International Plc, among the top four pound bulls, sees it soaring 9% to $1.51 by year end. Jordan Rochester, a strategist at Nomura, puts this down to lockdown ending, the possibility of a more hawkish BOE due to high levels of household savings and a strong housing market, and broad dollar weakness.

James Athey, Aberdeen Asset Management’s investment director who turned to being long from neutral on the pound after the BOE left rates unchanged last month, expects other investors will soon follow to take advantage of the pound’s “very cheap” value.

“The market doesn’t want to deal with bad news — the market is complacent and greedy,” Athey said. Covid developments “could really matter in the future, but the market will not willingly go there — it will be dragged kicking and screaming toward a less positive reassessment.”

Next Week

Sovereign issuance is due from Germany, Austria and Ireland for a combined 9 billion euros, according to Citigroup Inc. The U.K. sells almost 5 billion pounds of debt across three maturities.

Economic data is mostly second-tier and backward looking with the exception of euro area Sentix investor confidence numbers on Monday and German ZEW figures for July on TuesdayEuropean Central Bank speakers include President Christine Lagarde, Luis de Guindos, Francois Villeroy, Isabel Schnabel and others; the European Commission will publish its summer economic forecasts on WednesdayBank of England Governor Andrew Bailey speaks on a panel with ECB’s Lagarde on Friday

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