Pound Sterling Rises to New 1-Month Best against Euro and Dollar

- Johnson released from hospital
- Uncertainty on GBP outlook fades
- But -ve market conditions could hamper upside

12/04/2020. London, United Kingdom. Prime Minister Boris Johnson thanks the NHS in a video message on Easter Sunday. 10 Downing Street. Picture by Pippa Fowles / No 10 Downing Street

- Spot GBP/EUR rate at time of writing: 1.1435
- Bank transfer rates (indicative): 1.1135-1.1215
- FX specialist rates (indicative): 1.1300-1.1330 >> More information

- Spot GBP/USD rate at time of writing: 1.2508
- Bank transfer rates (indicative): 1.2170-1.2258
- FX specialist rates (indicative): 1.2300-1.2340 >> More information

The British Pound rose half a percent to record its highest levels in a month against the Euro and U.S. Dollar at the start of a holiday-shortened week in the UK, a move that coincided with a broad shift down in global market sentiment but positive domestic news concerning the health of Prime Minister Boris Johnson.

Johnson was over the weekend released from St. Thomas Hospital in London owing to a successful treatment for his Covid-19 infection that at one stage saw his odds of surviving down to 50-50.

Markets had last week took note of news of the worsening in Johnson's health, with the Pound losing ground on Tuesday night when it was announced the Prime Minister had been admitted to the hospital's ICU unit.

Johnson's serious condition last week injected a fresh dose of uncertainty into the UK's political-economic matrix, and as recent years have shown the Pound tends to respond poorly to such uncertainty. Therefore, news that the country's leader has been released from hospital to recuperate at his Chequers residence will likely impart some support to the Pound's valuation.

The Pound-to-Euro exchange rate reached a high at 1.1447 on Monday, which is over half a percent higher than where it started the week. The Pound-to-Dollar exchange rate posted a high at 1.2533, which is 0.45% higher.

It is hard to find the words to express my debt to the NHS for saving my life.

The efforts of millions of people across this country to stay home are worth it. Together we will overcome this challenge, as we have overcome so many challenges in the past. #StayHomeSaveLives pic.twitter.com/HK7Ch8BMB5

— Boris Johnson #StayHomeSaveLives (@BorisJohnson) April 12, 2020

The Pound's gains represent an extension of the positive momentum that came after the U.S. Federal Reserve increased liquidity lines to global central banks aimed at ending a global shortage of dollars.

A sudden surge in demand for cash during the coronavirus-inspired market meltdown in the first half of March appears to have placed significant pressure on the UK's financial services industry.

However, by providing direct liquidity to global central banks through the creation of swap lines, the Fed soon eased this pressure, which in turn appears to have fuelled a recovery in the Pound.

"We continue to see upside potential for Sterling. Despite its relative liquidity, the Pound was one of the G10 currencies most harshly punished by the dollar funding squeeze, possibly due to the UK’s large financial sector. As this issue seems to have been resolved, we expect Sterling to regain its lost ground by mid-year," says Gaétan Peroux, a Strategist at UBS.

Above: GBP/USD hits new one-month highs

The Pound has tended to rally alongside global stock markets as the currency has a positive correlation with risk appetite, and the broad recovery in global stocks has therefore been reflected in a stronger Pound.

"The Risk On – Risk Off (RORO) phenomenon is back with a bang," says David Bloom, Head of Global FX Research at HSBC. "This means that a much wider range of financial market assets are moving in a closely correlated manner and are being primarily driven by one specific factor."

According to HSBC, when sentiment is negative, the USD, JPY and to a lesser degree the CHF perform well. The losers have tended be NOK, AUD, SEK, and NZD. "GBP has also moved into the risk on bucket, possibly because of Brexit and the economy’s gradually softening ties with the big, closed economy of the Eurozone. We would expect RORO dominance to persist for the time being," says Bloom.

When sentiment is positive, fortunes change and hence we have seen some improvements for the likes of GBP, AUD, NZD, NOK and SEK of late.

However, the Pound is showing its own independent strength on Monday, April 13 as its gains come despite a broader softening in stocks: this could be due to domestic positives involving the Prime Minister or it could suggest a return of more severe financial conditions is required before FX markets start to be impacted.

Most stock markets that were open - largely in Asia and the Middle East - lost ground at as investors showed caution, as this week marks the start of the U.S. corporate reporting season which should highlight just how severe the coronavirus-inspired economic slump has been.

U.S. banks will kick off the reporting season and markets will be drawn to the number of distressed loan accounts they hold on their books as this will provide a decent steer as to the underlying stresses in the economy.

European countries are meanwhile starting to look at potential exit strategies from the harsh multi-week lockdowns that have all but pulverised economic activity, but as of yet there remain question marks as to just how soon the lockdowns can be lifted.

"The most important question for markets – when do economies reopen – remains a riddle. Beyond that, investors may be downplaying how long it will take for economies to recover. The speed of job losses in the US is simply mind-bending, and something similar is probably true in Europe. Those could take years to come back, arguing for a long and protracted recovery, especially when considering the scars this crisis will leave on consumer behaviour," says Marios Hadjikyriacos, Investment Analyst at XM.com.

While the Pound is pushing higher at the start of the new week, we would be wary that market conditions deteriorate once more, which would introduce downside pressures on the currency once more.

"We expect GBP to weaken further, with GBP/USD having topped out at 1.25. GBP strength versus EUR is also limited now, having retraced half of the prior rally and failed to break materially below the 0.8730 area. The UK has the largest current account deficit in the G10 and a large financial sector which has USD funding needs, suggesting that it is vulnerable to weakness in an environment of market volatility. GBP/USD also tends to follow oil prices, where the outlook remains unfavorable. The BoE's balance sheet is expected to expand over the coming months, keeping GBP weak," says Hans Redeker, Strategist at Morgan Stanley.