Pound Sterling rallied sharply during the mid-week Asian session and is holding the gains in London trade in am move that has opened fresh new multi-month highs, but the gains have left analysts scratching their heads why the currency is rising.
The consensus was decidedly negative on Sterling heading into 2021, with a good rump of the analyst community saying structural difficulties posed by Brexit would make the UK currency a laggard.
However, Sterling has outperformed expectations. On Wednesday, February 24, a spike saw the Pound-to-Dollar rate hit a new multi-month best at 1.4233, levels not seen since April 18, 2018, before a retracing back to 1.4164.
“In something of a parabolic move, cable jumped above the 1.42 handle, testing the bottom of the aforementioned double-top region. The move, seemingly driven by significant GBP demand with little news behind it, confirms that region as the next key resistance,” says Michael Brown, Senior Market Analyst at CaxtonFX.
British Pound Leaves Euro Behind
The Pound-to-Euro exchange rate triggered a fresh one-year high when it reached 1.1704, before retreating to 1.1643, where we find it at publication.
“The pound also continues to perform well against the euro, with EURGBP printing its lowest levels since February 2020 and breaking below the 0.86 handles overnight,” says Brown.
These new highs are significantly above where the consensus estimates for the end of the first quarter of 2021 were pricing the currency; indeed, the Pound is already far above consensus year-end forecasts.
“Sterling has continued its steep climb that started around the start of the year, with further gains against both the US dollar and the euro. Indeed, the cable is a little above our 2021 year-end target of $1.40, and EUR: GBP already where we had penciled it in for some time during Q3 2022,” says Philip Shaw, an economist at Investec.
“The G10 currency which is surprising me the most is sterling. Not because I never expected GBP/USD to get here – our forecasts look for it to spend the rest of the year in a 1.40-1.50 range – but because I don’t really understand why it’s so fashionable right now,” says Kit Juckes, a foreign exchange analyst at Société Générale.
However, the gains cast a favorable light on Pound Sterling Live’s week ahead forecasts (see our most recent GBP/EUR and GBP/USD articles), which have been bullish for some time and appear to be offering a good guide on the short-term moves.
Pound Sterling Live’s team thinks much of the Pound’s rapid upside is being driven by central bank buying. China is the main engine of appreciation as authorities use Sterling to rapidly appreciate Yuan in check, not to upset the U.S. Dollar.
It is also worth noting the jump in the Asian session of February 24 appears to have no specific catalyst but came alongside gains in the New Zealand and Australian Dollars, two ‘high beta’ currencies.
Indeed, it would appear that the Pound is now a fully functional ‘risk on’ currency that might benefit further if stock markets and commodity prices press higher.
Analysts at Bank of America entered 2021 resolutely bearish on the UK currency but say it is now “exceeding expectations.”
“Our skepticism about the durability of the GBP recovery beyond the initial relief has been misplaced,” says Kamal Sharma, a foreign exchange analyst at Bank of America.