Pound Hits Four-month High

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The pound reached a four-month high against the dollar and a two-month best against the euro.

Gains for the pound sterling come amidst holiday-thinned trading conditions and a classic Santa rally; with the major economic news releases out of the way, broader sentiment takes control of currency markets.

Gains for stocks and falling market volatility provide just the kind of background conditions that the pound tends to benefit from when the data calendars fall silent.

"Ginding up: Santa Claus is in town," says Neil Wilson, UK Investor Strategist at Saxo Markets. "On Wall St, as the S&P 500 rose for a third day with a sea of green across the board."

The UK's FTSE 100 hasn't been left behind either, steadily rising back towards record highs. The pound has a 'high beta' to stock market performance, says Kamal Sharma, currency strategist at Bank of America:

"GBP's sensitivity to world equity market has risen... about 35% of the currency's fluctuation can be explained by changes to the equity index"

📈 In response to the benign market conditions, the pound to euro exchange rate has risen to 1.1565, its highest level in two months, as we predicted in Monday's Week Ahead Forecast.

"We remain bullish on the GBP overall as there is scope for positioning there to improve amidst softening USD sentiment, removal of any lingering budget or political risk premia," says a note from TD Securities.

Above: GBP/EUR has met its 1.1460 objective where it will be tested by resistance. However, the short-term setup remains constructive.

📈 The pound to dollar exchange rate has risen to 1.3515, its highest level since September.

"Sterling ripped past $1.35 to hit its strongest level in three months versus the US dollar. The pound is also near its strongest in two months against the euro as sentiment seems towards the UK currency improves following the Budget. Broad dollar weakness is playing the starring role here, though," says Wilson.

Above: GBP/USD is now overbought following a strong rally. The RSI is above 70, indicating that a consolidation or a pullback is due owing to FX's mean-reverting tendencies.

However, some seasoned traders we follow think the Santa rally has run its course.

The Santa rally is a phenomenon that happens perennially, where stocks rise into year-end, usually without any notable trigger.

January can often see the move reverse, so we would encourage those with impending currency transfers to consider current levels in the context of returning volatility in the new year.

"I feel the 'Santa Rally' is now done and dusted. I don't know what the Market does from here until Jan 5th, but I do know that it's never wise to be a greedy little monkey that doesn't give thanks," says Le Shrub, the widely followed substack of a veteran fund management trader.