British Pound Catches Fresh Bid in NY Session, Eyes 1.15 v Euro Defends 1.39 v U.S. Dollar

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• Market rates at publication: GBP/EUR: 1.1489 | GBP/USD: 1.3909
• Bank transfer rates: 1.1260 | 1.3620
• Specialist transfer rates: 1.1400 | 1.3812
• More about bank-beating exchange rates, here

Pound Sterling built a fresh head of steam against most major currencies during the New York market trading session, with scant sign of a specific trigger to the fresh upside impetus.

What the UK currency does have though in abundance is positive technical buying momentum behind it, and given the relatively flat news and data environment this is carrying the day.

The Pound reversed an earlier day-on-day loss against the U.S. Dollar that persisted through the London session to move back above 1.39 during New York trade, and in the process kept the door open to a test of the psychologically significant 1.40 area.

Above: The GBP/USD daily chart

The Pound-to-Euro exchange rate (GBP/EUR) meanwhile flipped a flat performance to advance by 0.20% and test new nine-month highs at 1.1484 at publication.

"Global optimism and higher stocks helped Sterling extend its winning streak as it notched fresh 34-month peaks," says Joe Manimbo, Senior Market Analyst at Western Union.

The British Pound has developed a close linkage to broader stock market performance since Brexit faded as key consideration following the December signing of the EU-UK trade deal.

What happens to stocks is therefore relevant to how far the British Pound rally of early 2021 can extend.

"I think the stock market will continue to go higher, perhaps much higher. We’re in a position similar to Japan in the late 1980s, and for a lot of the same reasons. In Japan in the late 80s it was referred to as window dressing, mandating that banks had to lend to corporations. And that was the biggest driver of their bubble," says Zach Abraham is principal/chief investment officer of Bulwark Capital Management.

The latest Bank of America Global Fund Manager Survey released today shows that sentiment on global growth had now reached an all-time high as a view that a v-shaped recovery from the coronacrisis was now a consensus expectation.

Above: GBP/EUR chart showing 15-minute intervals

Domestically, the UK's vaccination programme remains a pillar of the Pound's fundamental outperformance.

But the outlook for the British Pound received a further boost on tentative data showing that EU-UK trade flows were approaching normality, alleviating fears that trade difficulties would pose significant headwinds to UK economic growth potential.

Real-time trade data is showing that post-Brexit trade is recovering, with the rejection rates being reported by those exporting goods into the EU via the French border falling substantially.

"UK virus infections appear to be slowing, vaccines are progressing rapidly and there are signs that the post-Brexit kinks in cross border trade are getting smoothed out, adding to the positive GBP undertone," says Shaun Osborne, a foreign exchange strategist with Scotiabank.

The developments, if sustained, will likely prove to be supportive of the British Pound's outlook given analysts maintain Brexit trade frictions are a key downside risk for the currency in 2021.

According to data from Transporean - a logistics facilitator and data provider - the rejection rate for cargo shipped to France from the UK almost halved last week.

This is the lowest since the last week of November.

"Market players are slowly adjusting to the new circumstances," Transporean tell the Bloomberg newswire.

Image courtesy of @lizzzburden, Bloomberg.

While the EU and UK agreed to tariff-free trade, the non-tariff barriers that have been erected are still significant and accounted for some difficulties for UK exporters in January.

"Obstacles threaten to result in weaker foreign trade and thus have a negative impact on economic growth - especially as trade frictions are expected to increase further in the course of the year when, after a transition phase, the UK also begins to implement full customs controls at its borders," says Thu Lan Nguyen, FX and EM Analyst at Commerzbank.

Commerzbank say the Pound could maintain its period of outperformance in the near-term, however a turn lower is likely over quarters.

"The successful vaccination campaign in the UK is fueling hopes for a quick recovery and boosting the pound. In the short term, the appreciation trend could continue, but as soon as the effects of the Brexit become more apparent, the trend is likely to turn again," says Nguyen.

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