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Pound Sterling Can Still Rediscover its Winning Ways agains the Euro and Dollar says CBA

Pound Sterling latest news

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  • Market rates at publication:
    GBP/EUR: 1.1499 | GBP/USD: 1.3777
  • Bank transfer rates: 1.1277 | 1.3490
  • Specialist transfer rates: 1.1420 | 1.3680
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  • Set an exchange rate alert, here

The British Pound is looking to rediscover the path of appreciation that it followed in the first three months of 2021, with the consolidation of recent days potentially offering a platform from which to bounce.

The Pound has struggled during April, a month that is traditionally one characterised by Sterling upside and the declines therefore go against a typically reliable seasonal trend.

A number of factors have been cited for the underperformance: 1) a positioning clear out 2) a diminution of the UK's once gaping advantage in the vaccination race 3) the resignation of Andy Haldane from the Bank of England, and 4) the potential for a strong pro-independence mandate outcome to May's Scottish elections.

Points 4 remains a headache for Sterling bulls that might only be resolved in May, but on counts 1, 2 and 3, the fundamental foundation for a recovery in the British Pound is intact.

Pound Sterling rally runs out of steam

On the matter of the resignation of Andy Haldane, the 'hawkish' Bank of England Chief Economist, Francesco Pesole at ING Bank says:

"Although a big hawk, his departure shouldn't alter the pound's prospects for the coming months as no imminent BoE tightening was on the table."

Joseph Capurso, Head of International Economics at Commonwealth Bank of Australia has meanwhile reminded clients that the outlook for the Pound remains constructive in his view.

"GBP/USD continues to trade firmly. There is plenty of economic slack in the UK with GDP 7.8% below the levels seen in February 2020. However, leading indicators point to a sharp recovery in UK economic activity in the next few months which favours a higher GBP versus USD and EUR," says Capurso.

Capurso has looked at the stringency of lockdown measures in various countries, judging that economic outperformance is in store for those where measures are due to loosen.

As of 9 April, New Zealand and Australia had the most relaxed stringency measures compared to other major economies.

Stringency measures

The fluctuations in stringency over the past year highlight the uncertainty of the virus’ path and the UK was subject to the most strict conditions for much of the first part of 2021 as the country dealt with a sharp wave of infections dealt by the B1.1.7 variant.

But, the success of the lockdown combined with a rapid vaccine rollout means a steady drop in stringency conditions is likely.

"The UK’s stringency index is expected to edge lower as England loosened its lockdown restrictions this week," says Capurso.

Capurso says the challenge facing the UK is the need to maintain control of the virus while people’s mobility increases and its European neighbours continue to grapple with the third wave of virus.

"But the UK’s rapid vaccination will reduce the risks of renewed outbreaks. In our view, continued success in the vaccine roll-out will translate to a rebound in the UK’s economic activity which bodes well for GBP," he adds.

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GBP/EUR Forecasts 2021

Period: Q2 2021 Onwards
Details: Consensus institutional forecast targets + max & min targets.
Contributors: Citi, Barclays, Morgan Stanley & more
Provider: Global Reach
Type: Free Download
Please Access Here

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GBP/USD Forecasts 2021

Period: Q2 2021 Onwards
Details: Consensus institutional forecast targets + max & min targets.
Contributors: Citi, Barclays, Morgan Stanley & more
Provider: Global Reach
Type: Free Download
Please Access Here

"GBP is well placed to continue its outperformance on the crosses, particularly vs EUR, where it had suffered as a result of prior risk aversion. The UK reopening plans remain on track, unlike in Europe, and inflows into value in the context of the longer term UK asset underweight should remain supportive," says Kurran Tailor, analyst at Citi.

Politics have been a feature of Sterling exchange rate valuations since 2016 as the UK approached the EU referendum, which ultimately resulted in a vote to leave.

The result of that vote was years of political intrigue that weighed on the Pound and strategists say the easing of that premium since the striking of the EU-UK trade deal in December 2020 could help the Pound recover.

But no sooner is the Brexit premium evaporating a new political premium regarding Scotland starts to build.

It is noted that pro-independence parties in Scotland are polling a majority and a pro-independence 'supermajority' could be installed in Holyrood in May.

"The approaching Scottish parliamentary elections in early-May are the next important political event risks for the GBP," says Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

The Pound declined as uncertainty concerning the outcome of the 2014 independence plebiscite built, with a sharp relief rally occurring after it was clear the independence movement lead by Alex Salmond had been defeated.

This post-vote reaction confirms the Pound tends to trade at a discount when political uncertainty becomes elevated, and this uncertainty is likely to build again over coming weeks and potentially months if fears for Scottish independence build.

"If the SNP win with a majority of the 129 seats (either alone or with allies like the Greens) it would likely result in a new Scottish independence vote push," says Shahab Jalinoos, Global Head of FX Strategy at Credit Suisse.

"We accept that this poses a material risk to a positive GBP position," he adds.

The Pound-to-Euro exchange rate was seen trading at 1.1499 at the time of writing, the Pound-to-Dollar exchange rate is seen at 1.3770.

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