29 April: When the Pound’s Good Run Against the Dollar Could End

Exchange rate analysis

The GBP/USD exchange rate has broken above the 200-day moving average (1.2555) for the first time since the Brexit referendum of June 2016.

This represents a potentially notable shift in momentum for Pound Sterling which might now enjoy further gains owing to increased positive momentum.

Aiding the move higher is the fading of Brexit headlines with politicians on both sides of the English channel knocking-off for their Easter break.

The hiatus in Brexit chat - which is more often than not negative for Sterling - has allowed markets to send higher an incredibly undervalued British Pound.

UK economic data released seen in April - while not brilliant - still point to decent economic growth which drives home the point that Sterling is underpriced.

Forward-Looking Bias: Weakness to Return with the EU Politicians

But, the period of Pound Sterling appreciation is unlikely to last we are told.

“The lack of data and parliament’s Easter recess mean that sentiment towards GBP will be swayed by the posturing of both UK and EU in advance of genuine Brexit negotiations,” says Tim Riddell at Westpac Bank in London.

Riddell says the influence of posturing by politicians should gain force after the EU (ex-UK) Brexit summit on 29th April, which should provide some clarity on the EU’s negotiating stance.

Initial comments from EU and notably German officials appear to be gearing towards a “hard Brexit”.

We get the sense that the heat will rise at the summit.

Leader after leader will line up in front of the cameras at this event and try to outcompete each other with their warnings that the UK can expect no favours; an already hard stance towards the country will be hardened.

Indeed, we would expect more red lines to be laid down as different European countries attempt to get a piece of the UK pie.

The EU wants to punish the UK for leaving the club - despite the official line that they will be fair in negotiations - markets could be shocked by what they hear and Sterling is where this shock will be expressed.

Furthermore, the firmness of the consumer into 2017 and the rebound in business sentiment may now be faltering.

The warnings from BoE that consumers will face a squeeze from higher prices and low wage prospects could now appear in survey data.

Recent housing data has been softening and should also weigh on household spending and confidence.

“GBP/USD should struggle above 1.26 before sliding towards recent range lows,” says Riddel.

Therefore, April 29 2016 could be an important date for the Pound.

Also recall that we have reported here that April tends to be a positive month for Sterling. For the last 12 years without fail, GBP has rallied against the USD with an average monthly gain of 2.2%.

The currency has also done well against the Euro.

The observation has many in the analytical industry understandably confident that this April will be no different and that we should therefore expect the UK currency to rise.

Oliver Harvey at Deutsche Bank says a potential reason for Sterling’s historical outperformance in April relates to dividends.

“After annual reporting in the first quarter, April is often the month when dividends fall due. With over two thirds of FTSE 100 earnings made abroad, cash must be repatriated to pay them,” says Harvey.

May does not tend to offer the Pound similar benefits, and this is another reason why we could see the Pound's good fortunes fade at the start of the new month.

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