Pound Rally Holds Up as Traders Look Through Gloomy U.K. Data
The pound rallied a second day even after disappointing data, as the gloomy economic picture was offset by lingering optimism following the Conservatives’ election victory.
Sterling strengthened versus most Group-of-10 peers despite U.K. factories posting their weakest performance in more than seven years. The currency earlier advanced as much as 0.7% after Chief Secretary to the Treasury Rishi Sunak said the government plans to put legislation before Parliament before Christmas to ensure Brexit goes ahead next month.
“As expected, the U.K. PMIs came in a tad underwhelming,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. “In all, I think investors will ignore the data and focus on the new Boris cabinet which should be announced later today and could give us some clues about the likely strategy as we approach the trade negotiations with the EU. The pound remains a buy on dips.”
The pound has recovered significant ground since the election result but with one big barrier removed, the question now is how much further the rally can run. Investors will probably need to see improving economic data or progress in the next stage of talks with the EU to meet the most bullish forecasts, which call for a rally to $1.40 or beyond.
Sterling gained 0.3% to $1.3373 as of 12:21 p.m. in London after surging as much as 2.7% on Friday to $1.3514, the strongest since May 2018. It strengthened 0.1% to 83.33 pence per euro. Analysis from ING Groep NV predicted that price action in the pound should stabilize, with the bank forecasting a trading range of between $1.3200 and $1.3520 next week.
Currency strategists at HSBC Holdings Plc see the biggest surge in the pound since 2017 as only the start of the rally. Prime Minister Boris Johnson’s plans to boost spending should give the economy a shot in the arm and help the pound to $1.45 by the fourth quarter of 2020, the strategists said in a note dated Thursday.
The bank’s rates team has a very different view on the U.K.’s economic prospects. For head of U.K. rates strrategy Daniela Russell, the weak incoming economic data supports the case for a Bank of England rate cut next May and, along with continued Brexit uncertainty, will likely push government bond yields down to 0.40% by the end of 2020.
The U.K. currency is being pushed higher by hedge funds, according to an Asia-based currency trader, who asked not be named because the person is not authorized to speak publicly. Most clients are confident that Johnson will successfully execute Brexit with the EU and reach a free-trade agreement with the U.S., the trader said.
A Citigroup Inc. index indicated currency funds have almost completely unwound their bearish bets on sterling. The latest data from the Commodity Futures Trading Commission shows asset managers also flipped from a net short to net long the pound before the election, with the data covering the week to Dec. 10.
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