The British Pound starts the new week materially lower than where it was at the half-way mark of the previous week thanks to an aggressive sell-off on Thursday and Friday, and one analyst we follow says the currency has now peaked.
“Many positives are in the price of the overvalued and overbought GBP in our view,” says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
Pound Sterling May Not be as Strong Next Week
The Pound fell amidst a wide decline in stock markets and commodity prices, confirming the currency to be highly sensitive to investor sentiment.
Therefore trade in Sterling over the coming days could well depend on how the broader market landscape performs.
The big theme for investors is the rise in yields paid on government bonds, particularly long-term duration. This rise in yields comes as investors dump these bonds, fearing higher inflation in the future, which would materially eat into their investments.
However, what is curious is that the rise in bond yields actually reflects expectations for economic growth ahead, which would typically be expected to support stock markets and other ‘risk on’ assets, of which the Pound is now considered.
Therefore, good news out of the U.S. economy could well be bad news for markets and Sterling in this counterintuitive world. This is because investors bet that good economic data means the Federal Reserve will ultimately have to withdraw the generous stimulus that has fueled markets higher.
If this week’s U.S. ISMs and non-farm payrolls surprise on the upside and continue this theme, the Dollar could well find itself supported this week, says Marinov.
By contrast, Marinov eyes the Pound and Australian Dollar as the two most at-risk currencies should strong economic data trigger another rise in the value of U.S. yields.
“Persistently higher UST yields can also start weighing on risk-correlated and commodity currencies vs the USD. Our recent sensitivity analysis highlights that the AUD and the GBP could be the most vulnerable to a potential combined spike in UST yields and risk aversion,” says Marinov.
Turning to the Pound’s stellar 2021 rally, which made it the best G10 performer of the year until the end-week selloff, researchers at Crédit Agricole say the gains are now in, and a weaker profile is likely.
“Many positives are in the price of the overvalued and overbought GBP in our view,” says Marinov. “The GBP has little else to offer beyond its apparent vaccine advantage.”
Modelling by Crédit Agricole suggests that the Pound Sterling comes in last in a ranking of FX fundamentals due to the UK’s inferior economic productivity, current account deficit, recent stock market performance, low real yields and extreme lockdown severity.
Analysis also shows the Pound is starting to look overvalued, when using both short-term and long-term valuation models.
Analysts at HSBC last week told client the Pound is trading well above levels justified by fundamental factors that should mean it is anchored lower.
“GBP’s reach exceeds its grasp,” says Dominic Bunning, a strategist at HSBC in a recent briefing on the currency. “In our view that upward momentum is undeserved from a value perspective. The move in GBP has far exceeded that of other anchors which one would normally associate with currency outperformance.”