- GBP/USD eyeing 1.40 this week, ahead of higher levels.
- GBP favoured in ongoing investor positioning adjustment.
- Chequered USD P&L shows position adjustment ongoing.
- Charts point GBP/USD above 1.40: May go as far as 1.43.
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- GBP/USD spot rate at time of writing: 1.3830
- Bank transfer rate (indicative guide): 1.3458-1.3555
- FX specialist providers (indicative guide): 1.3635-1.3746
- More information on FX specialist rates here
Pound Sterling extended its 2021 lead over a range of currencies including the Dollar last week but could continue to confound market expectations over the coming days as the greenback, in its role as the taxi cab of the foreign exchange market, drives the British currency toward 1.40 and above.
The Pound remained an outperformer of the fledgling year last week having swept aside less-than perfect economic data and rhetoric from the government suggesting that any reopening of the economy may be slower in coming to fruition than observers had previously anticipated.
"The strong performance of sterling has continued. GBP has rallied to 1.3850, and the psychological 1.40 level could be reached," says Georgette Boele, a senior FX strategist at ABN Amro. "We think that there is not much to cheer. The economy is weak and the Bank of England could ease policy further. At some point, the UK outperformance on vaccinations compared to the US and the eurozone will wane. We think that GBP/USD is very expensive."
Many observers have noted the less-than optimal conditions for outperformance by Sterling, one that has seen its correlation or 'beta' to risk and commodity assets increase, but in a world where almost all central banks are pushing back against strength in their currencies, it becomes easier to understand.
Above: Sterling Vs the majors over selected timeframes. Source: Netdania Markets. Click for closer inspection.
"GBP/USD is deeply undervalued relative to the level implied by US/UK GDP price deflators and real UK‑US interest rate differentials," says Elias Haddad, a senior strategist at Commonwealth Bank of Australia. "We don’t expect additional BoE policy rate cuts. In our view, the risk is GBP/USD edges up to 1.4000 in the next few months."
The Bank of England gave an upbeat assessment of the economic outlook on February 04 and showed confidence in its ability to reach the inflation target over the medium-term. This is the opposite to complaining about currency strength, and may partly explain the Pound's strong run higher.
"We are maintaining a long cable trade idea. The GBP has risen to fresh highs against the USD over the past week resulting in cable hitting an intra-day high of 1.3866 as upward momentum remains in place. It could encourage a move back towards the highs from early in 2018 when cable briefly traded back above 1.4000," says Lee Hardman, a currency analyst at MUFG. "Long GBP positioning remains light despite recent strong upward momentum and should not be an impediment to further gains."
GBP/USD Forecasts 2021
Period: Q2 2021 Onwards
FX for Businesses Guide
Sterling's outperformance comes amid a broader, multi-week positioning adjustment among investors which as of yet, has produced no clear trend toward anything other than the Pound. The biggest loser amid this position shift was the U.S. Dollar last week, but over longer timeframes, the profit-and-loss is much more mixed for the Dollar.
"The EU is still alarmingly behind peers in the vaccine roll-out as the UK and the US secured deals faster than the EU, but also chose to emergency-approve the vaccines instead of sticking to a bureaucratic process. The first simple post-Brexit match-up is so far a big 1-0 to the UK versus the EU. This is probably a good reason to buy GBP since the UK will be free from restrictions earlier than the EU. Even if it is already partly a consensus story, we still find more potential in the GBP bet," says Martin Enlund, chief FX strategist at Nordea Markets.
In the context of the investor positioning shift, last week's widespread U.S. Dollar decline becomes more understandable, as well as potentially misleading. Not least of all because of the U.S. Dollar's role as the taxi cab of the foreign exchange market, which forces participants to buy and then sell the U.S. currency in order to go from A to B.
Above: Quotes & performances over various timeframes. Selected markets, Netdania Markets. Click for closer inspection.
Nobody can get from one place to another in the market without availing a Dollar cab, part explaining why, in the context of the ongoing shift, U.S. Dollar rates are often seen higher only for them to later be seen lower.
Widespread Dollar declines last week do not necessarily mean the positioning shift has resolved in favour of further weakness for the U.S. currency over the coming months, although they did reinforce the clear and apparent trend toward strength in Sterling and other European currencies.
"The ever-dovish Fed continues to pour cold water on any suggestion that less policy accommodation may be needed from here. At the same time, the BoE has recently downplayed the need for further easing, despite the still uncertain UK economic outlook. The seemingly subtle differences between the BoE and the Fed have translated into a sizeable outperformance of the GBP Vs the USD," says Valentin Marinov, head of FX strategy at Credit Agricole.
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Sterling strength is at least an interim trend, which many analysts connect to the faster rollout of coronavirus vaccines in the UK and the relaxed stance of the Bank of England, which all may have played a role in making the Pound more attractive to other central bank reserve managers.
The Pound has become more attractive to some reserve managers and their related bid for Sterling is a part of what's given the currency enough momentum to get analysts looking for further gains up to what would be 2018 highs.
"GBP/USD has eroded the 1.3836 February 2016 low and this has introduces scope to our longer term target offered by the 2018 peak at 1.4377. Near term dips should now see 1.3750 act as initial support," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.
Above: Pound-Dollar rate shown at daily intervals alongside EUR/USD (orange) and GBP/EUR (blue).
There HAS been a central bank bid for the Pound, coming from Asia, and one that is key to the recent broad uplift in European currencies. And this HAS to be sustained if the latter is to continue, given objections of the European Central Bank (ECB) et al to exchange rate appreciation.
"US President Biden spoke to US senators yesterday after a two-hour call with Chinese President Xi on Wednesday and warned that "If we don't get moving, they are going to eat our lunch," says Allan von Mehren, Chief Analyst at Danske Bank. "It highlights Biden's stronger focus on investing in the US to keep the country ahead in the future compared to Trump's approach of holding China back through export bans on technology."
What's not yet clear to any market participant or analyst is just how durable this recent bid for Sterling and other European currencies is. This could be dictated as much by the evolution of U.S.-Chinese relations, as it is by anything else.
Presidents Joe Biden and Xi Jingping held their first call of the former's presidency last Wednesday and while the White House's readout of it was nuanced, Chinese state media coverage of it has been celebratory.
"These conflicting signals also need to be weighed alongside Biden's own messaging on China, which is/has been difficult to decipher. Trade issues did appear to take a backseat, however, given the 9.0% appreciation of the CNY vs the USD during the past 3.5 quarters. Were this not the case (or had the US side continued to push for smaller merchandise trade deficits with China), there would now be a much clearer bias in USDRMB, one way or another," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "Part of the difficulty is that the aforementioned appreciation of the CNY reduced the chances of a trade-related clash this week, and this has left investors still having to make vast assumptions about the US's strategic approach to China. On the basis of total return, we'd continue to argue that short USDCNH exposures make the most sense for the immediate future. But we're more cautious about the CNH appreciation side of that equation, as opposed to the carry."
Above: Renminbi quotes & performances over various timeframes. Netdania Markets. Click for closer inspection.
You think US money supply is surging?— Otavio (Tavi) Costa (@TaviCosta) February 12, 2021
That's just a blip.
China increased theirs by $5.4T since March.
Their money supply is now 81% larger than the US. pic.twitter.com/os3GNO7NUO
Pound Sterling Live recommends to its readers this and this from China's Global Times. If anything, this is for the time being a downward signal for the Dollar and an upward indicator for European currencies to the extent that they are influenced by the reserve management activities of the People's Bank of China. The latter is likely a buyer of Sterling this week, the author believes.
"It is still far from an independent central bank," says Scott Kennedy, a senior adviser writing on February 08 for the Center for Strategic and International Studies. "U.S. policymakers and the financial community should pay close attention to how the PBOC speaks to markets to understand how Chinese economic policies are implemented, but everyone should recognize that on critical issues, higher authorities within the central government and the Chinese Communist Party (CCP) still set the agenda and speak most authoritatively."
Above: Pound-to-Euro rate at weekly intervals, with GBP/USD (blue) and EUR/USD (orange). Bullish setup.