Investment banks have become more bullish about sterling, as it is trading close to an all-time high against the dollar. It also has a five-month-high against the euro. This is due to expectations that the UK’s economy will perform better than expected.
On Tuesday, the pound traded at $1.2618, near to its $1.2688 high on Monday. This is its highest level since March 2022. Sterling’s highest level since mid December was reached by a euro buying £0.8698.
Analysts think that the conditions are right for the recovery of the pound to continue. This is after it rose on the back of a number of better than expected data in this year’s gross domestic product (GDP), manufacturing, and employment, as well a drop in the price of gas, and a general weakness of the dollar.
Goldman Sachs said in a recent research note that they were “taking an outright positive stance” and expected the pound’s value to rise against other currencies, including the euro.
The report added that “basically, we believe that the same factors which acted as a headwind on sterling in the year 2022 – mainly natural gas prices and relative stances of BoE policy – have now turned into tailwinds.”
In recent weeks, many traders who were betting against the pound at the beginning of the year due to forecasts of an economic recession have closed out their bets, helping sterling rise.
Citigroup, a bearish firm on sterling that has been predicting a decline for months, admitted in a Tuesday note that they were “wrong”. They added that, “contrary of what we had expected, the UK economy has shown to be far more resilient”.The strength of the pound comes before the Bank of England interest rate meeting, which will take place on Thursday. Markets have already priced in an almost certain 0.25 percentage-point rate hike, following the Federal Reserve last week and the European Central Bank.
Themos Fiotakis is the head of FX Research at Barclays. He said that a more positive economic outlook for the UK coupled with a persistently high inflation rate meant “the BoE needed to be one of hawkish central bank”. Swaps market participants are pricing in at least two more rate increases by September.
Paul Robson, NatWest’s head of G10 FX Strategy, said that the UK economy was holding up better than many people had anticipated. “Most data surprises have been positive and people are having to reconsider their overly pessimistic outlook.”
Sterling has also reached its highest level since December. Christian Kopf, the head of fixed-income at Union Investment in Germany, the third largest asset manager, believes that the euro will weaken against sterling further from its current £0.87 level to £0.83 before the summer of 2024.
He explained that this is due to a variety of factors, including the higher interest rates in Britain compared to Europe, the lessened impact of Brexit on the trade and the “dissipation” of the safe-haven status of the Euro and Swiss Franc. He said that this was encouraging investors to invest in “carry trades”, which offer higher returns.
Kit Juckes is a currency analyst at Societe Generale. He said that sterling was boosted by the fact “the enormous short position” against the currency had been closed out.
The US Commodity Futures Trading Commission data shows that traders were positive about the pound last month for the very first time in over 14 months. More futures contracts bet on it rising for the first since February 2022.
There are more traders who bet on the strength of the euro than on the sterling. Juckes stated that sterling was “an easy way to be short the dollar”, because the euro is “a very crowded trade”.
NatWest predicts that sterling will reach $1.30 at the end of this year. NatWest’s Robson stated that lending in the US would be worse than in the UK. He added that the UK’s economy, which is more dependent on services rather than manufacturing in comparison to other countries, should work in sterling’s favor.
Citi predicted that the euro would continue trading between £0.87 and £0.89 before the BoE rate decision. However, it said sterling, when compared to the dollar, “would continue its appreciation in our base scenario”.
Sterling’s recent gains have also been boosted by a period of calm political climate and the signing of “Windsor Framework”, which aims to ease the implementation of post- Brexit trade rules in Northern Ireland.
Athanasios Vasvakidis is the head of G10 Foreign Exchange Strategy at Bank of America. He said: “The truth of the matter is, the Rishi-Sunak administration has reduced a number of risks. We have the agreement with Northern Ireland and better cooperation with the EU, as well as political stability.