– GBP has eaten its fill of good news
– Analysts downbeat on prospect of fresh gains
– Scottish elections on investors’ radar: Morgan Stanley
Image © Bank of England
- GBP/EUR market rate at publication: 1.1500
- Bank transfer rates (indicative): 1.1200-1.1270
- Specialist transfer rates (indicative): 1.1390-1.1420
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Market participants looking for a stronger British Pound continue to endure testing conditions in which gains tend to evaporate, leaving the UK currency struggling to rediscover the form it enjoyed earlier in 2021.
The failure of the UK currency to advance of late comes as numerous analysts we follow say much of the good news that drove those earlier advances have simply been absorbed into the price.
“We have got a very dull EUR/GBP forecast, on the grounds that the good news is in, and there’s nothing on the horizon to suggest sterling can rally much further,” says Kit Juckes, Global Head of FX Strategy at Société Générale.
The Pound-to-Euro exchange rate (EUR/GBP) started 2021 at 1.1132 before riding a wave of buying interest up to a high of 1.18 on April 05.
Above: GBP/EUR daily chart for 2021.
At this time Pound Sterling Live data showed a flurry of rate alert requests being placed for a rate of 1.20 by those looking to transact in the deliverables market.
The behaviour is seen as a sure sign of growing confidence at the time that further gains would surely follow.
Instead, 1.18 appears to represent a high-water marker for the pair as subsequent price action has seen a retracement to the 1.1460-1.1500 area the market is currently churning within.
Foreign exchange analysts at Nordic bank SEB say the Pound had been bid as the UK economic outlook has improved markedly during the past months due to successful vaccination programmes.
“This has resulted in a rapidly stronger GBP,” says a note from SEB.
But SEB says a lot of the positive news has now already been priced into Sterling and the Eurozone is potentially next in delivering good news.
“That could take back some of the recent GBP gains,” says SEB.
The improved UK economic outlook comes as Covid-19 cases and deaths continue to creep lower in tandem with a steady vaccination drive.
Above: UK covid vaccination statistics. Image courtesy of @UKCovid19Stats
The progress has allowed the government to put in place a programme of unlocking that should ultimately see restrictions dropped completely from June 21.
Economists at HSBC say the resultant economic pickup in the wake of the unlocking will put pressure on the Bank of England (BoE) to exit its programme of extraordinary monetary support for the economy.
HSBC’s forecast for the May BoE meeting has moved from anticipating additional quantitative easing to now forecasting a tapering of quantitative easing.
The market has therefore flipped from flirting with negative rates to pricing in 50bp of tightening over the BoE’s 3-year forecast horizon.
These developments underscore the BoE’s shift from the ‘dovish’ end of the monetary policy spectrum to the ‘hawkish’ end.
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The general rule of thumb in foreign exchange is that when a central bank embarks on such a journey the currency it issues rises in value.
Daragh Maher, Head of Research, U.S., at HSBC says this shift in expectations justifies the strong performance of the British Pound for much of 2021 so far.
But, “we believe a lot of this good news is now priced into the currency,” he cautions.
Maher says the challenge for the Pound is how fast other countries close the gap on its early lead in vaccinations at a time when interest rate hike expectations are already quite hawkish.
If the good news is “in the price” it stands that a new positive driver must arrive, or alternatively, that any existing anxieties are lifted.
GBP/EUR Forecasts 2021
Period: Q2 2021 Onwards
FX for Businesses Guide
Period: Q2 2021 Onwards
One potential trigger to further gains could lie with next month’s Scottish election result.
Scotland votes for a new Holyrood parliament on May 06 and numerous analysts are now saying that fears of a pro-independence majority being installed at Holyrood are why the Pound is finding little traction.
Morgan Stanley foreign exchange strategists say the Scottish election and the French general election in March 2022 are the two most frequently asked questions they are fielding at present.
They say clients specifically want to know what these respective political event risks pose for GBP and EUR.
“Currently investors are not pricing much uncertainty for either event as there are so many unknowns and follow-up hurdles before the results could impact economic outcomes,” says Sheena Shah, a foreign exchange strategist with Morgan Stanley.
“We don’t expect large moves in GBP following the Scottish May 6th election. As the market has priced a lot of optimism around the BoE rate path and the UK vaccine programme, we remain short GBP/USD,” she adds.
On the announcement of the May 6th election results, Shah says Sterling may respond and weaken on the day if the SNP were to win a large majority of seats.
“But we don’t think the market impact would be long-lasting,” says Shah.
At the time of writing the Pound-Euro exchange rate is quoted at 1.15.