Published on: 2023-05-10
Sterling’s strength
GBP/USD was trading at 1.2618 on Tuesday, close to the 1.2688 it hit on Monday, its highest level since April 2022. EUR/GBP fell to 0.8698, the lowest level since mid-December.
Analysts believe that conditions are in place for the pound’s recovery to continue as U.K. economy proves to be stronger than expected.
Many traders, who had been betting against the pound around the start of the year amid forecasts of a deep recession, have been closing out their bets in recent weeks.
Last month traders turned positive on the pound for the first time in 14 months, CFTC data shows.
Brighter economic outlook
Themos Fiotakis, head of FX research at Barclays, said a brighter economic outlook in the UK combined with persistently sticky inflation meant “the BoE needs to be one of the more hawkish central banks”.
Markets have priced in a near certainty of a 0.25bp rate rise, in line with the Fed and the ECB last week.
Swaps markets are currently pricing in two and possibly three more rate rises by September, while the Fed signalled possible end of rate hikes.
NatWest expects sterling to strengthen to 1.30 by the end of the year. ‘We feel lending in the US will be more impaired than in the UK,’ NatWest’s Robson said.
He added the fact that the UK economy is more reliant on services than manufacturing compared with other countries also acted as a tailwind.
U.K. banks recently saw significant deposit outflow despite of few signs of systemic risk which hit the U.S. financial sector.
Citi said it expected EUR/GBP to keep trading in the range of £0.87 to £0.89 in the near term ahead of the BoE rates decision, but said GBP/USD “would continue to appreciate in our base case”.
Christian Kopf, head of fixed income at Union Investment, expects the euro to weaken further against sterling from its current level of 0.87 to 0.83 by the summer of 2024.
Political risks
The signing of the “Windsor framework”, intended to smooth implementation of post-Brexit trading rules in Northern ireland, has also played to sterling’s advantage in recent months.
The deal sets out the agreed changes to be made to the Protocol relating to customs, VAT, regulation in goods, state aid regime, as well as addressing the democratic deficit.
‘The truth is that, with the Rishi Sunak administration, a number of tail risks have been reduced, we’ve got the agreement on Northern Ireland, better co-operation with the EU and political stability, particularly compared with what happened last year,’ said Athanasios Vamvakidis, head of G10 foreign exchange strategy at Bank of America.
Kevin McCarthy on Tuesday said there was no movement from either side in debt limit negotiations as a crucial deadline on the matter looms following a meeting with Joe Biden.
A failure to find a resolution to the US debt ceiling standoff presents a genuine risk to the standing of the dollar, according to Goldman Sachs.
