Pound Sterling Powers into Month-End

- GBP maintains multi-month rally into end-January
- But Bank of America say further GBP strength unlikely
- Nomura 'go short' on GBP/USD

Above: File image of Governor Mark Carney Image © Bank of England, Bloomberg. Reproduced under CC licensing

- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
- Bank transfer rates (indicative): GBP/EUR: 1.0520-1.0596 | GBP/USD: 1.1537-1.1620
- Specialist money transfer rates (indicative): GBP/EUR 1.0650-1.0701 | GBP/USD: 1.1650-1.1745 >> More details

The British Pound has on Friday extended its gains against the world's major currencies following the Bank of England's decision to keep interest rates unchanged and is now set to be the best-performing major currency of January.

Renewed upside momentum comes following the decision by the Bank of England (BoE) to keep interest rates unchanged, a decision that was not at all guaranteed as market odds heading into the event suggested there was a 50/50 chance of a Sterling-negative interest rate cut being delivered.

Currencies tend to react to surprises and given the coin-toss odds for a rate cut it was always likely Thursday's decision would propel Sterling either higher or lower.

"The Pound was the stand-out G10 currency, responding to the decision of the BoE to refrain from cutting rates that had been partly priced," says Derek Halpenny, Head of Research, Global Markets EMEA at MUFG in London. "Over the short-term we can see the pound advance further."

The Pound jumped in the minute prior to the release of the Bank's decision which leaft interest rates unchanged at 0.75%; that Sterling moved ahead of the official release has been the source of much chatter and speculation in the analyst and trader communities.

Regardless of the timing of the move, the Pound recorded gains against all the other currencies that make up the group of the world's 10 largest freely traded currencies:

Above: Sterling's gains on Thursday following the BoE decision

The Pound is now set to exit January on the front-foot, ensuring that a multi-month period of appreciation for the currency ultimately remains intact:

Above: The Pound's performance in January.

The Pound-to-Euro exchange rate has risen to a high of 1.1950 having been as low as 1.1630 at the month's low point on January 14. The Pound-to-Dollar exchange rate has rallied to a high of 1.3140 in the wake of the BoE decision, having been as low as 1.2957 earlier in the month.

The Janaury lows in Sterling coincided with a rapid increase in expectations that January 30 would see the Bank cut interest rates, at one point money market pricing suggested odds of 70% for a rate cut.

Nevertheless, the strength of recent survey data releases - from the CBI, IHS Markit, Deloitte and Lloyds Bank - all suggest a sharp improvement in sentiment in January. The message from the Bank was that they have acknowledged these surveys and opted to maintain a wait-and-see stance, while a stabilisation in the global economy meant there was no need to provide stimulus via lower interest rates.

Regarding the potential threat to the global economy of the coronavirus outbreak, the Bank said it was still too early to react.

"The focus will likely rest on the economic recovery, with the Sterling surge highlighting the fact that traders are largely optimistic about the coming months," says Joshua Mahony, Senior Market Analyst at IG.

Speaking to journalists following the rate decision, Governor Mark Carney said "to be clear, these are still early days. It is less of a case of so far, so good, than so far, good enough” when referring to UK economic data. It will be important for the hard data on activity to follow through on the recent pick-up in the surveys, and for domestic price inflation to strengthen."

Carney has now made his final appearance at the MPC, and will hand the button over to Andrew Bailey.

We think markets will pay particular attention to any initial speeches given by the new governor in order to gauge how he might set the tone going forward.

Upside Momentum

Further short-term gains in Sterling, against most currencies, appears to be possible based on recent momentum.

With regards to the GBP/EUR exchange rate's outlook, Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank says the Pound-Euro exchange rate has successfully broken through the 20-day and 55-day moving average resistance levels at 1.1785 and 1.1764, and now attention turns to the 1.1933 target, which forms the 61.8% retracement of the Pound's December-January decline.

Jones says the Euro remains "under overall pressure", now that the GBP/EUR exchange rate has successfully bounced on the 1.1614 support area.

Above: The GBP/EUR daily chart showing a Sterling's ongoing appreciation against the Euro

But Sterling's Gains Forecast to be Short-Lived

The question now becomes how far Sterling can appreciate, and whether the Bank of England boost is a sustainable one.

While there is a broad consensus amongst analysts that short-term gains can continue, questions are asked about the Pound's ability to go higher over a multi-week timeframe.

"We would argue that a lot has to go right for the BoE to avoid monetary easing from here and we see numerous risks, most of which are to the downside," says Halpenny. "A more muted bounce in domestic demand will see Pound gains reverse. The productivity assumptions of the BoE if realised is bad news for the Pound and no justification for any sustained rally."

A number of analysts say that the Pound's rally is likely to be short-lived in nature, with the reason being market focus will soon shift back to the more difficult issue of EU-UK trade negotiations.

"For now, we would expect cable to stabilise slightly above 1.30, but further strength is unlikely," says Athanasios Vamvakidis, FX Strategist at Bank of America. Vamvakidis says the British Pound's rally in the wake of the decision is justified, but going forward data and EU-UK trade talks will take the lead, and the path "is unlikely be a straight line".

"Given our scepticism over Brexit uncertainties diminishing much as UK-EU trade negotiations evolve we assume the hard data fails to meet expectations... Difficult trade negotiations, and a more muted bounce in domestic demand will see pound gains reverse," says MUFG's Halpenny.

Jordan Rochester, FX Strategist at Nomura International, says it is time to 'go short' on Sterling against the Dollar (i.e. sell GBP/USD) in the wake of the Bank of England decision, as market focus shifts to other drivers.

"Brexit talks could start on a bad footing," says Rochester, "the coronavirus may lead to more market uncertainty or indeed weaker confidence in surveys next month. Most importantly, the market remains long GBP here and this will require more 'good news' to keep the price action sustained."

Above: GBP/USD has been consolidating within a technical 'triangle pattern'. Technical analysts are now looking for a breakout (higher or lower) and a new trend to begin.

However, Rochester does make it clear that Sterling could yet still rise against other currencies, but just not against the Dollar:

"Green shoots in UK data remain, the BoE is unlikely to cut rates in coming months. Both would typically argue for a stronger Pound. Indeed vs peers such as Scandinavian currencies and the $-bloc we expect GBP outperformance. But versus the USD it’s a different outlook because of the rising concerns over the virus outbreak in China and the drag on global growth it may cause."