Pound’s Swift Drop Wipes Out April Rally in Bleak Start to Month
(Bloomberg) -- It is only the start of May and the pound has already seen its entire April rally wiped out, just as established seasonal trends point to further declines.
The British currency could be in for a particularly unforgiving time. May has been its worst month every year since 2010 with an average decline of 2.3% against the dollar, according to analysts at Bank of America Securities. That adds to headwinds for a currency already contending with the economic shock from the pandemic as well as drawn-out Brexit uncertainty.
“The negative seasonality appears to have intensified in recent years, with 2018 and 2019 posting more than 3% negative returns in sterling-dollar,” said BofA analysts including Kamal Sharma, in a client note.
“As much as April is a positive month for the pound, driven in large part by the new U.K. tax year and corporate dividend repatriation of overseas income, May is a month where dollar strength is the main driver for sterling-dollar under-performance,” Sharma added.
The pound fell as low as $1.2406 Monday, enough to briefly wipe last month’s 1.4% advance during May’s second session. That’s after April was 2020’s only bright spot, which in itself followed sterling’s worst first quarter since 2016. The pound was at $1.2421 as of 2:31 p.m. London time, down 0.7 per cent for the session.
Sterling has lost more than 6% this year against the broadly-stronger dollar, as the coronavirus shutters cities and businesses across the U.K. and wider risk appetite wanes on global markets. The focus moves back to the Bank of England Thursday. While there are expectations it could ease monetary policy further at some point to offset the economic damage inflicted by the virus, such action may not come as soon as at this week’s meeting.
Alongside the pound, currencies such as the Australian dollar, Norway’s krone and the euro also struggle, according to BofA.
“This pattern of FX performance strongly suggests that May is a risk-off month,” Sharma wrote. “The only currencies that may prove immune to the broad-based rally in dollar are the Swiss franc and yen which could buck usual seasonal trends in an unprecedented market environment.”
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