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British Pound "Tends to Rally no Matter what" in April

- Bank of America latest bank to call stronger Pound Sterling in April

- Joins Deutsche Bank in being tactically long GBP

- Key quotes: Pound-to-Dollar exchange rate @ 1.4196, Pound-to-Euro exchange rate @ 1.1444

Pound Sterling

© Massimo Usai, Adobe Stock

A notably pro-Sterling call has been issued by one of the world's largest dealers in foreign exchange as we approach a new month.

"April seasonality is approaching again for GBP, which tends to rally no matter what the political/macro backdrop," says Kamal Sharma, FX Strategist with Bank of America Merrill Lynch Global Research in London.

The call is given further weight if we consider that it does not come in isolation, indeed Sharma is the second major FX analyst whom we report as having a "tactically" bullish stance on Pound Sterling heading into the month of April.

Last week we reported Deutsche Bank analyst Oliver Harvey was turning "tactically bullish" on Sterling against the Euro citing - amongst other reasons - that April tends to be a month in which the Pound outperforms its major rivals, and April 2018 should be no different.

Bank of America have told clients they too are looking to "take advantage of this strong trend" and enter a short-term tactical trade that looks to benefit on further gains by Sterling against the Dollar.

The Pound's performance in April

Deutsche Bank seasonality

Above: April is typically a good month for the Pound Trade Weighted index - an overall measure of Sterling against a basket of currencies. The Euro is the largest component of the GBP TWI, implying outperformance aginst the Euro.

"Within the G10 FX complex, there is no stronger seasonality than in GBP through April," says Sharma. "GBP/USD has rallied every single year for the past 14 years."

Sharma says this "remarkable outperformance" covers major events such as the financial crisis, general elections and the Brexit referendum, and suggests to him a consistently strong underlying flow which has trumped these idiosyncratic factors.

"A combination of the end/start of the UK tax year and a heavy month of dividend payments by UK corporates are factors which we think are at play driving GBP strength during April," says Sharma.

Furthermore, the underlying domestic environment appears to be a little more favourable to the Pound at this juncture now that the EU/UK have agreed on the contours of a transition agreement and the MPC sounding hawkish.

"With a strong print on average hourly earnings and with reports that the public sector wage cap will be lifted in the coming months, market expectations are likely to maintain further policy tightening in 2018," adds Sharma. "A reduction in near-term political uncertainty should see GBP focus on its near-term macro drivers."

Bank of America are looking to bet on a rise in Sterling against the US dollar in particular and are entering a trade at 1.4080 eyeing gains as far as 1.4445.

Risks to the trade are increased protectionist concerns which will weigh on "high beta" GBP. At the time of writing it appears that the rhetoric around global trade is starting to settle down again, and if the US administration doesn't throw out too many surprises on the matter going forward this risk should recede.

In a note to clients, Deutsche Bank's Harvey says the we are "entering a period in which seasonal gains for GBP have been very strong as a result of dividend repatriation flows. GBP TWI has rallied each of the last fourteen years during the month of April."

The GBP TWI is the Pound Trade Weighted Index - a measure of Sterling value against a basket of the currencies of those countries with which the UK conducts the majority of its trade.

With the Eurozone being the UK's largest trading partner it should be no surprise that the Pound-to-Euro exchange rate is the biggest pair in the Pound's TWI.

"While Sterling denominated dividends are in structural decline, they might buck the trend this year as income from commodity-based FDI investments should be strong," says the analyst.

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