Pound Sterling Breakout against the Euro and Dollar Still On: BofA

- GBP/EUR looks to test 1.18
- GBP/USD 'random walk' extends
- BofA see upside break potential
- Supported by M&A interest in UK
- Comes as UAE commits £10BN in investments

Pound can break higher in 2021

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The British Pound's incessant churn within well established ranges against the Euro and Dollar has been a feature for the majority of 2021, but a breakout is still possible over coming weeks says a leading analyst.

Pound Sterling's apparently indecisive drift sideways is however a necessary process required ahead of a fresh push higher says Kamal Sharma, G10 FX Strategist at Bank of America.

"We continue to believe that the next trend remains higher headed into year-end," says Sharma in a regular currency briefing.

Sterling rushed into 2021 and went higher against the world's major currencies but stalled in April and has since zigzagged sideways against most.

Sharma says the easy gains for Sterling in 2021 are behind it and has stressed to clients in a previous research note that advances in the second-half of the year would be hard fought for the bulls.

"This is probably a necessary process that is needed before GBP can finally recalibrate to its cyclical indicators which still remain supportive," says Sharma.

The Pound-to-Euro exchange rate is presently edging higher within a multi-week range and analysts are now eyeing the 1.18 level which forms the 2021 high.

Technical analysts would say the Pound is liable to face a setback on any test of this area, as history has a tendency of repeating at significant levels given market participants will layer orders in the vicinity.

Pound Sterling Live's own rate alert system shows significant order interest at 1.18 and if this is repeated across the market Euro purchases will increase steadily as the exchange rate moves in on the round number, creating headwinds to further Sterling gains.

Pound to Euro chart

Above: GBP/EUR daily chart showing a well defined range.

However, a break above 1.18 could see the exchange rate enter fresh air as orders are left behind and open the door to the next round number at 1.19.

For the Pound-to-Dollar exchange rate there is a solid floor of support at 1.36 that looks a difficult proposition for Dollar bulls to break, obvious upside resistance is the round number 1.40 and then the 2021 high at 1.4250.

But this exchange rate is proving particularly difficult for technical analysts to call in the short-term given its random walk around the 1.38 fulcrum.

Pound to Dollar chart showing pivot level

Above: GBP/USD looks to increasingly drawn to the 1.38 level, creating a pivot.

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Bank of America's economists have recently downgraded their UK economic growth forecasts for the year, however they still remain some of the highest amongst the economies of the world's ten largest freely-traded currencies.

"Expectations have run ahead of reality and are now in the process of mean reverting. We think that is a necessary prerequisite before GBP can break out of its recent ranges," says Sharma.

A breakout higher is more likely than a break lower according to Sharma who says an improvement in the currency's fundamental dynamics cannot be ignored.

"A key pillar of our views on GBP this year has been the ability of the UK to attract in the post-Brexit environment," he says, adding:

"The evidence this year has been positive: our real-time measures continue to point to strong investment inflows into the UK asset markets".

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Inward investment into the UK has accelerated in 2021 as Brexit uncertainty fades into the background.

On September 16 it was announced that the UAE had pledged to expand investment in Britain with a multibillion-pound commitment that will make other investors "sit up and take notice" said one UK minister.

A government official briefed on the talks told the FT the UAE's overall investment commitment over five years would be about £10BN.

For the Pound, such deals are significant.

"Foreign purchases of UK gilts have surged this year and more significantly (for FDI) has been renewed interest in UK M&A corporate acquisitions," says Sharma.

Above image courtesy of UBS.

The subject of strong inward M&A investment flows and the support they lend Sterling has been touched upon by Pound Sterling Live numerous times over recent weeks.

Theta Global Advisors says the UK has banked $343.1BN worth of M&As, which is double the volume of 2019 and the highest since 2000 and signals a significant return of confidence in UK assets.

The Pound struggled in the wake of the 2016 EU referendum and the years that followed as investors and consumers grappled with uncertainty concerning the economic and political outlook facing the country as a result of its transition away from the EU.

"2021 is proving to be a record year for M&As and other kinds of deals as a large amount of uncertainty melts away that has lingered from Covid and Brexit. It is a perfect storm of returning optimism, loosening restrictions and undervalued firms," says Chris Biggs, Partner at Theta Global Advisors.

Bank of America's foreign exchange research team anticipate the shift in sentiment as supportive of the Pound going forward.

"Should GBP continue to find flow support as it has done for much of this year, and with GBP positioning adjusting in conjunction with the mean reversion in expectations on UK growth, we think that the period of GBP consolidation is likely coming to the end," says Sharma.

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