British Pound’s latest jump against the Euro leaves analysts scratching heads 

british-pound-sterling-GBP-21-1

Pound Sterling rallied sharply during the mid-week Asian session and is holding the gains in London trade in am move that has opened fresh new multi-month highs, but the gains have left analysts scratching their heads as to why the currency is rising.

Consensus was decidedly negative on Sterling heading into 2021, with a good rump of the analyst community saying structural difficulties posed by Brexit would make the UK currency a laggard.

However, Sterling has outperformed expectations and a spike on Wednesday February 24 saw the Pound-to-Dollar rate hit a new multi-month best at 1.4233, levels not seen since April 18, 2018, before a retracing back to 1.4164.

“In something of a parabolic move, cable jumped above the 1.42 handle, testing the bottom of the aforementioned double-top region. The move, seemingly driven by significant GBP demand with little news behind it, confirms that region as the next key resistance,” says Michael Brown, Senior Market Analyst at CaxtonFX.

The Pound-to-Euro exchange rate triggered a fresh one-year high when it reached 1.1704, before retreating back to 1.1643 where we find it at publication.

“The pound also continues to perform well against the euro, with EURGBP printing its lowest levels since February 2020, and breaking below the 0.86 handle overnight,” says Brown.

These new highs are significantly above where the consensus estimates for the end of the first quarter 2021 were pricing the currency; indeed the Pound is already far above consensus year-end forecasts.

“Sterling has continued its steep climb that started around the start of the year, with further gains against both the US dollar and the euro. Indeed, cable is a little above our 2021 year-end target of $1.40, and EUR:GBP already where we had pencilled it in for some time during Q3 2022,” says Philip Shaw, an economist at Investec.

“The G10 currency which is surprising me the most, is sterling. Not because I never expected GBP/USD to get here – our forecasts look for it to spend he ret of the year in a 1.40-1.50 range – but because I don’t really understand why it’s so fashionable right now,” says Kit Juckes, a foreign exchange analyst at Société Générale.

The gains do however cast a favourable light on Pound Sterling Live’s week ahead forecasts (see our most recent GBP/EUR and GBP/USD articles), which have been bullish for some time and appear to be offering a good guide on the short-term moves.

Pound Sterling Live’s team think much of the Pound’s rapid upside is being driven by central bank buying, with China being the main engine of appreciation as authorities use Sterling to keep a rapidly appreciating Yuan in check in order to not upset the U.S. Dollar.

It is also worth noting the jump in the Asian session of February 24 appears to have no specific catalyst, but came alongside gains in the New Zealand and Australian Dollars, two ‘high beta’ currencies.

Indeed, it would appear that the Pound is now a fully functional ‘risk on’ currency that might benefit further if stock markets and commodity prices press higher.

Analysts at Bank of America entered 2021 resolutely bearish on the UK currency, but say it is now “exceeding expectations”.

“Our scepticism about the durability of the GBP recovery beyond the initial relief has been misplaced,” says Kamal Sharma, a foreign exchange analyst at Bank of America.

“Our default position for much of the past five years has been one of healthy scepticism towards Brexit and its implications and whilst the UK’s handling of the pandemic in 2020 was lacking, it is in stark contrast to the highly effective vaccine roll-out in 2021,” says Sharma, adding:

“This should position the UK economy for a stronger recovery in the coming quarters as the UK emerges from and enough to provide GBP with further support heading into a strong seasonal tailwinds in April.”

UK-based assets has found favour amongst investors since the signing of the EU-UK trade deal in December 2020, which has lifted some of the uncertainty that marred the outlook for UK assets in general.

“The UK outperformance has been a theme since the start of the year as UK assets have benefited from falling uncertainty following the Brexit resolution as well as the very good progress on COVID-19 vaccinations especially vs. the rest of Europe,” says Christian Mueller-Glissmann, an economist at Goldman Sachs.

Mueller-Glissmann’s colleague, Michael Cahill, a foreign exchange strategist, says of Sterling’s gains:

“We are likely observing some lagged follow through from the clearing of Brexit uncertainty, since the trade agreement coincided with concerns over the new Covid variant and renewed lockdowns”.

Source: PoundSterlingLive

Leave a Comment


Broker Cyprus TopFX