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Pound Sterling's February Outlook: Conflicting Thoughts for the Month Ahead

By Gary Howes

outlook for the british pound sterling in February

The start of February has been a tough one for those traders and retail currency market participants holding out for higher British pound sterling exchange rates. What does the outlook for the remainder of February hold though?

The February outlook is negative: Our view

The pound sterling exchange rate complex has been rattled by a some below par PMI readings in February; the result has been a sharp correction lower.

At Pound Sterling Live we see this move as a natural re-calibration by markets as UK economic data releases fail to offer upside surprises.

After all, it's no longer a surprise if it happens regularly, and in this game surprises are what drive currency movements!

Therefore, we expect a period of sterling weakness to be driven by a settling of expectations which will create a decent platform for a resumption of a sterling rally in coming months.

(If you think the best is over and need to purchase a signficant amount of FX then consider this: Your bank's FX rate is compromised by the large spread they charge. However, an indepndent FX provider has access to significant inter-bank liquidity, thus allowing them to deliver up to 5% more currency in some cases. Find out more.)

Outlook for the British pound sterling in February remains positive

Another view on the February outlook is offered by Stephen Gallo at BMO Capital who is decidedly more positive on the British pound exchange rate complex.

Gallo today tells clients:

  • We think the risks of another ‘macro pru’ policy shift by the BoE in February may be bigger than consensus
  • The BoE can implement ‘macro pru’ policy shifts at any time, including at or between FPC/MPC meetings
  • We expect the GBP to remain firm in Feb. after the recent ‘clear out’ of GBP longs, but below the Jan. avgs.
  • Nominal spreads should continue to provide support on dips, but new ‘macro pru’ can deter aggressive buying
  • We expect GBPUSD to hold 1.623-1.640 with the Fed ‘tapering’, EURGBP a better ‘divergence’ play for now

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  • GBP more sensitive to equities in Dec-Feb: obsession over the impact of the Fed ‘taper’, risk-off.
  • Broad & service-sector CPI pressures have tended to weaken, service sector conditions dipped in Nov-Jan
  • BoE’s Carney unofficially ‘dropped’ the 7.0% threshold for interest rate hikes whilst in Davos
  • Some reserve interest to buy has stepped aside above 1.645-1.650 on Fed ‘taper’, longs have been squeezed
  • Short-term nominal spreads have not surpassed their end-Dec levels in favour of GBPUSD

Outlook for the euro / pound exchange rate faces uncertainty thanks to ECB

Don't forget the European Central Bank when considering the euro pound exchange rate.

There is talk of the ECB enacting some kind of stimulatory measure in tomorrow's monthly policy announcement, such a move would be EUR-negative.

Gallo says his bank is ready for further EUR downside:

"EURGBP downside risks if the ECB chooses to suppress yields further.

"With a further easing of ECB policy on the cards, the better opportunity to play UK ‘divergence’ is via Europe and EURGBP.  

"This is the case because rate spreads remained a key driver of EURGBP throughout 2013. This dynamic looks set to continue for most of 1H 2014.  

"We look for opportunities to profit from EURGBP downside by selling within the 0.828-0.834 range for the time being, expecting a move back to 0.815-0.820."

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