Pound Sterling Rediscovers Winning Ways

- Strong rebound in GBP
- Strategists say GBP now a buy
- Footfall jumps 88% since April 12 reopening

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The British Pound was the best performing major currency at the start of the new week as it showed intent to finish what is traditionally a strong month from a seasonal perspective on the front foot.

The Pound put its April blues behind it by going up over three-quarters of a percent against the Euro and 1.25% against the Dollar on Monday, with gains largely holding into Tuesday.

The Pound-to-Euro exchange rate (GBP/EUR) rallied to a daily high of 1.1642 on Monday, the best exchange rate for Euro buyers since April 07. However, some of the shine in the exchange rate is coming off through the Tuesday session as the Euro-Dollar rate jumps 0.30% and pushes further above the 1.20 level. 

The Pound-to-Dollar exchange rate (GBP/USD) rallied to a daily high of 1.4008 on Tuesday, the best exchange rate for Dollar buyers since March 18.

Just as it was hard to pin any decisive factor on the losses recorded over the first half of April, so too it is difficult to find a single narrative to explain the sudden revival in appetite for the Pound.

Above: GBP performance at the start of the new week. 

History shows that April is typically a bullish one for the Pound with data suggesting gains tend to occur in the latter end of the month, therefore a tinge of seasonality could be one factor to consider.

"April does seem to be historically strong for the UK," says Jordan Rochester, foreign exchange strategist at Nomura. "With the April seasonality effect for GBP/USD coming up, there should be support to keep GBP’s uptrend intact."

"April is usually a strong month for GBP. Due to the UK tax year’s end at the beginning of April, large corporations domiciled in the UK bolster demand for the UK Pound when repatriating overseas profits. This real money flow tends to provide a significant and tangible bid in GBP that sees the spot price outperform," says Charles Porter, analyst at SGM Foreign Exchange Ltd.

Foreign exchange strategists at Barclays said on Monday they are confident enough in the Pound's prospects to initiate a "trade of the week" that seeks to profit on any further recovery against the Euro.

In a weekly strategy briefing to investment bank clients analysts at Barclays say they believe the recent decline in Sterling value is overdone and recommend going 'short' on the EUR/GBP exchange rate, with a target for declines set at 0.8560.

This equates to a Pound-to-Euro exchange rate (GBP/EUR) upside target of 1.1682.

Barclays say the recent decline in Sterling against the Euro "is not supported by fundamentals, hence we expect some correction".

They are looking for a slew of UK data due this week to serve up a reminder to investors of the UK’s rapid economic rebound potential amid the economy reopening in the wake of a rapid vaccination programme.

The benefits of the vaccination programme were on full display in the Monday's UK covid-19 statistics that showed just four people died of the virus in the previous 24 hours.

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Vaccine confidence could be seen in data due out this week which include inflation on Wednesday; but it is perhaps the PMI survey for April out on Friday that offers a better guide for markets given they will be more timely.

The PMI's are the most time sensitive set of data available for markets and investors will be looking for signs that the unwinding of covid-19 restrictions this month are feeding to a pickup in economic activity.

Barclays are forecasting a "flash" Composite PMI reading of 58.2. They are expecting Eurozone Services PMI - also due out Friday - to decrease to 50.2 on the back of tighter stringency measures.

The Barclays exchange rate call is one of short-term duration that is expected to expire on Friday.

But also looking for a rebound in Sterling - however, over a longer-term time period - are strategists at Commonwealth Bank of Australia (CBA).

In a strategy note released on Monday CBA say they are targeting downside in EUR/GBP to extend to 0.8000.

This gives a target in GBP/EUR of 1.25.

"In our view, EUR/GBP has plenty more room to drift lower. The starting point is EUR/GBP remains highly overvalued relative to the level implied by real interest rate differentials," says Elias Haddad, Senior Currency Strategist at CBA.

Image courtesy of CBA. 

"Real EU‑UK 2 and 10‑year swap rate differentials are at levels indicative with EUR/GBP at around 0.70000," says Haddad.

The Pound has been bought over recent months as investors bet the UK economy would bounce back in strong fashion in 2021 as it recovered from the covid-19 pandemic.

Key to that rebound was the UK's rapid vaccine rollout programme which now leaves more than 60% of the adult population vaccinated and bestows a greater confidence on investors that the reopening will be a permanent one.

"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 research briefing note from SEB.

Expectations for the UK economy to recover sharply have been boosted by retail market researcher Springboard, who said Monday the number of people visiting retail destinations jumped a whopping 88% in the week to April 17 vs. the previous week.

The jump came after non-essential stores reopened April 12 after three months of lockdown.

Annually, footfall was up more than four-fold.

"The extent of the uplift last week means that the gap in footfall from 2019 across all UK retail destinations has narrowed by more than a half in a single week, reaching the level achieved after two months of trading following Lockdown 1 in 2020," said Springboard.

Springboard noted that despite last week's big improvement, footfall is still down 25% from two years earlier, which is arguably a more important statistic given most economists like to see how current activity compares to pre-lockdown activity.

In high streets, footfall is down 35% from two years ago, while in shopping centres, it is down 28%. In retail parks, the decline was just 2.0%.

Image courtesy of Capital Economics. 

"Retail footfall improved from being 65% below the level two years earlier in the week to 10th April to being 25% below in the week to Saturday 17th April. That’s a decent step-up," says Paul Dales, UK Economist at Capital Economics.

Dales notes the number of people dining at restaurants increased from being 100% below the 2019 level on average in the week to 10th April to being 47% below in the first week after restaurants were allowed to resume serving customers outside.

"Again, that’s a solid increase in just one week," he says.

"The early evidence supports our view that the reopening of non-essential retailers and outdoor drinking/dining venues last Monday marked the start of a rapid rebound in economic activity," says Dales.

Capital Economics say the evidence supports their forecast that monthly UK GDP will go from being 7.8% below its February 2020 peak this February, to about 3% below by the time most sectors are fully open in July, and back to the February 2020 level before the end of the year.