Pound Needs Positive Catalyst to Reach Fresh Post-Brexit Highs

(Bloomberg) -- The pound hit a post-Brexit high against the dollar last week, but it may need stronger-than-forecast data to help it maintain its rally.

Sterling touched its highest level versus the greenback since June 24, 2016 on Friday, aided by broad dollar weakness. With traders positioning for further pound gains, some analysts were advocating caution as the U.K. currency’s strength didn’t appear to be backed up by fundamentals.

Pound Needs Positive Catalyst to Reach Fresh Post-Brexit Highs

U.K. wage inflation and fourth-quarter gross domestic product data due this week could prompt repricing of Bank of England monetary policy expectations and help to anchor sterling at its current levels, according to ING Groep NV. Viraj Patel, a currency strategist at the Dutch bank, who sees the pound heading toward $1.50 by year-end, said he was “surprised” by the speed of the currency’s ascent and thinks it needs another catalyst to push past $1.40.

“Markets aren’t going into next week with any major positive expectations so the scope for surprises and knock-on effects for the pound could be pretty big,” Patel said. “We really need to see some positive pound catalysts to take us beyond some really big psychological levels.”

Data Drivers

Average weekly earnings are seen holding steady for December from the prior month, while gross domestic product is expected to fall slightly for the fourth quarter, according to median forecasts in Bloomberg surveys. Should either of these data surprise to the upside, they could trigger further sterling strength, Patel said.

Options traders are betting the pound will continue to rally, with three-month risk-reversals in the British currency against the dollar reaching the highest level since 2009 on Friday.

Near-term direction in the pound may also be driven by Brexit developments following a report Friday that the U.K.’s Labour opposition will seek to change the Brexit legislation in the House of Lords, the U.K.’s upper chamber.

“The pound has been pretty resilient to Brexit-related news recently,” said Jane Foley, head of Group-of-10 currency strategy at Rabobank. “It seems that there are more investors concerned that there could be a move higher this year if a trade deal is struck. That said, this confidence is likely to erode if the time frame between now and March 2019 shrinks without many positive developments.”

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