U.K.’s ‘Horror Movie’ of a Reopening Shrugged Off by Pound Bulls
(Bloomberg) -- The economic gloom is lifting so fast in the U.K. that even the skeptics are warming to the pound. Never mind a likely delay to the reopening.
Already up more than 4% from this year’s low in January amid one of the world’s fastest vaccine-rollout programs, sterling is winning fresh backing as the faster-than-expected recovery fuels speculation that the Bank of England is about to take a hawkish turn. ABN Amro, a long-time bear, just revised up its pound forecast, as has Citigroup Inc. Bulls predict further gains too, with Nomura International Plc and Societe Generale SA seeing the pound erasing all its post-Brexit losses by year-end.
As central banks around the world move toward reversing the emergency bond-purchase programs and interest-rate cuts enacted during the height of the coronavirus crisis, traders are betting that the BOE will be near the front of the pack. And that’s eclipsing expectations for Prime Minister Boris Johnson to announce on Monday that the full reopening of the economy -- scheduled for June 21 -- could be pushed back for as long as four weeks.
The lockdown headlines “are like key moments in horror movies -- each new one shocks the audience less,” said John Roe, the head of multi-asset funds at Legal & General Investment Management Ltd. in London, who has been long on the pound since December. “We love the pound. A few weeks while they work out what’s going on, from a macro perspective, isn’t that important.”
The pound was little changed at 1.4099 as of 8:48 a.m. in London. It traded as high as $1.4248 on June 1 after starting the year at $1.3670.
Money markets show traders expect the BOE to increase its key interest rate in early 2023 as the economy rallies from its worst downturn since 1709. Against this backdrop, Georgette Boele, a senior foreign-exchange strategist at ABN Amro in Amsterdam, revised her year-end forecast for the pound to $1.40, from $1.32 previously.
The worry for pound bulls is that the highly transmissible delta variant of the coronavirus, first identified in India, is leading to an exponential rise in cases. Daily infections have climbed to their highest level since February even though doses sufficient for 52% of the U.K. population have been administered, compared with 48% for the U.S. and 32% for the European Union, according to data compiled by Bloomberg.
“Another Covid wave could lead to weaker growth, and a paring back of rate-hike expectations,” said Mike Riddell, a money manager at Allianz Global Investors in London who is currently “moderately underweight” on sterling. “I’d be surprised if the market continues to fully price in a rate hike at the end of next year if the U.K. is back in lockdown, and this should push sterling lower all else being equal.”
Still, that likely wouldn’t be a problem specific to Britain, Riddell said. The U.K. is among the first of the developed nations to have both a successful vaccine roll-out and the wide spread of a highly transmissible variant, a combination that could eventually spring up in other nations.
Though sterling may trim some of this year’s gains should Johnson postpone the lifting of restrictions, any declines will be temporary, analysts and fund managers say. More fundamental forces, including the government’s handling of post-Brexit spats with the European Union, are likely to drive the price action.
An escalating trade dispute with the bloc has raised concerns about a threat to peace in Northern Ireland. The EU’s patience is running thin and it warned this week of “swift” and firm action if Britain again breaches the terms of the Brexit deal.
But after years of tension some suspect the latest flare-up will die down. “Both sides understand that they need some kind of compromise,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale in London, who sees the pound trading at $1.46 by year-end.
Nomura, among the five most bullish firms on the currency, sees sterling ending the year at $1.51, more than wiping out the losses sustained after the June 2016 Brexit referendum. Though it may retreat if the reopening is delayed, that would merely provide traders with an opportunity to add to their long positions, according to Jordan Rochester, a London-based strategist at the bank.
While BOE Governor Andrew Bailey has insisted that price pressures are transitory and don’t require an immediate change in direction, policy maker Gertjan Vlieghe said officials could raise the benchmark rate as early as next year if the labor market recovers smoothly when the government’s furlough support ends in September.
Britain’s economy is on course to expand 6.2% this year, according to the median of 60 economist forecasts compiled by Bloomberg. It’s estimated to have contracted more than 10% in 2020.
Some economists are also starting to sound the alarm on accelerating prices. U.K. inflation is forecast to rise above the BOE’s 2% target by the end of the year. It was 1.5% in April.
The BOE’s next policy announcement is on June 24, and investors are likely to scour the minutes of their meeting for clues on policy.
“Economic performance in this final part of the reopening stage, focusing on service sector, is going to pretty strong,” said Joe Little, global chief strategist at HSBC Asset Management, which is long the pound against the dollar. “Sterling has done well of course but we think there is scope for it to push higher still and there isn’t any sign of overvaluation.”
The Federal Reserve’s rate decision on Wednesday is the other major event for the week, alongside a slew of mostly backward-looking European data.
Sovereign issuance is due from Germany, the U.K. Spain and France. Combined supply is estimated around EU30b, according to Commerzbank.
- The Norges Bank will announce its policy decision on Thursday
- German inflation data for the month of May will be published Tuesday; eurozone inflation data to be published Thursday
- European Central Bank speakers include Klaas Knot, Pablo Hernandez de Cos, Isabel Schnabel and others
- Bank of England Governor Andrew Bailey speaks at a conference on Monday
©2021 Bloomberg L.P.