Pound Rally May Lose Momentum After Recent Run of Positive News

(Bloomberg) -- The pound’s recent rally makes it vulnerable to a pullback.

Last week saw the currency’s best performance since January, as the U.K. agreed a Brexit transition deal and the Bank of England maintained expectations of a May interest-rate hike. With little on the calendar this week to drive the currency, the pound could be buffeted by global factors, including fallout from a U.S.-China trade war.

Pound Rally May Lose Momentum After Recent Run of Positive News

“After a fairly punchy rally this week, we’re looking for a bit of consolidation in the pound,” said Viraj Patel, a currency strategist at ING Groep NV. “Naturally investors may look to take profit in the absence of any further near-term catalysts, while the trade war story partially reduces the appetite to chase any procyclical or central bank normalization story.”

One-week volatility on the pound-dollar pair remains low, while risk reversal options are trading around parity, suggesting little appetite to push the currency either way. In terms of events, there is final fourth-quarter growth data on Thursday, but no changes are expected from a 0.4 percent initial quarterly reading, while the week is shortened by the Easter holiday.

Policy Path

The U.K.’s economic outlook suggests a need for “one or two” interest-rate hikes per year, said BOE Monetary Policy Committee member Gertjan Vlieghe on March 23. A day earlier the BOE reiterated that any increases would be gradual, and money-market pricing remained largely unchanged afterward.

Credit Agricole SA closed its long pound-swiss franc position after the pair hit 1.3435 in the aftermath of the BOE meeting, saying the U.K. currency will likely trade range-bound or head lower in the near-term with some positives already priced in.

“The pound’s cheap valuation has primed it to respond with greater alacrity to good news than to bad,” said Kit Juckes, chief currency strategist at Societe Generale SA. “Real yield differentials however suggest that sterling needs an entirely new path of monetary policy to make further significant progress, rather than the modest tightening currently priced in.”

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