Pound Sterling Suffers Early-June Jitters, But Outlook Remains Constructive

- GBP is worst performer at start of new month
- Amidst "concerted efforts" to delay ending lockdown
- But JP Morgan are buyers
- Reuters analyst says GBP/USD can reach 1.50

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The British Pound was the worst performing currency at the start of the new month with some analysts pinning the performance on fears of a delay to a full relaxation of Covid-19 restrictions in England, however others remain optimistic on the currency's outlook.

The Pound lost ground against the Euro, Dollar and a host of other major currencies amidst ongoing concerns that a rise in Covid-19 cases could mean the June 21 ending of all Covid-19 restrictions is delayed, a move that is interpreted as being detrimental to the optimistic narrative surrounding the UK economy that has underpinned Sterling gains in 2021.

Jeremy Thomson-Cook, Head of FX Strategy at Equals Money, says those looking for higher Pound exchange rates in the coming weeks will need either one or both of two factors to pull it in their favour: 1) further comments from Bank of England policymakers that interest rates are heading higher, and/or 2) the reopening of the UK economy continues as planned on June 21st.

"Ultimately case numbers remain low but with some areas in London seeing a 50% increase in cases over the course of a week, pressure will increase on government to dab the breaks and prevent a feared a third wave," says Thomson-Cook in a daily currency briefing.

Whatever the reason, the Pound certainly was on offer at the start of the new month with falls coming against all its major G10 peers:

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The Pound-to-Dollar exchange rate (GBP/USD) had actually touched a new three-year high earlier on June 01 at 1.4250 but subsequently retreated back below 1.42 by June 02, taking other Sterling exchange rates lower.

This included the Pound-to-Euro exchange rate (GBP/EUR) which eased back below 1.16 to 1.1574, suggesting a range play remains intact here.

"GBP/EUR sits in a tight trading range since the surge seen last Thursday," says Joe Manimbo, Senior Market Analyst at Western Union Business Solutions. "Concerns remain over whether the UK economy will be able to fully re-open as planned."

UK national media is awash with warnings from senior medical advisors and pandemic specialists urging the government to delay the June 21 easing of restrictions.

They cite the rapid rise in cases of a strain of Covid-19 first identified in India which appears to be more transmissible than existing strains. This allows the disease to punch into unvaccinated pockets of the population with greater ease.

Image courtesy of NBF Economics

However, data does not yet show any substantial shift in hospitalisations in areas impacted by the variant and the government says it continues to watch the data closely.

Boris Johnson on Tuesday stood by his comments that there is nothing in the data to suggest a deviation from England’s reopening on 21 June according to a Downing Street spokesperson.

Business minister Paul Scully also said on Tuesday there was "cautious optimism" that the date for the final lifting of restrictions could go ahead as planned.

He told Times Radio the government did not want to have to roll back restrictions again.

"The UK’s ability to stick to its intended path out of the most recent lockdown has provided GBP with support. Had the UK missed those dates set forward in the roadmap out of the pandemic, Sterling crosses would be unlikely to be where they are today," says Charles Porter, SGM Foreign Exchange Ltd.

Porter says the government’s ability to stick to its roadmap was driven by low rates of infection, hospitalisation and a strong vaccination programme, all of which he says the currency market finds desirable in and of themselves, aside from the economic boost that opening an economy brings.

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"But this latest and arguably biggest step of the roadmap out of lockdown and Covid restrictions sits less than three weeks away. If the UK fails to meet the June 21st line in the sand for a further liberalisation of its social restrictions markets could panic about the UK’s battle with its own epidemic and the uncertainty surrounding the path of economic and social normalisation could deter demand from GBP markets," says Porter.

Despite some early-June jitters centred on uncertainty around the roadmap, a good portion of the foreign exchange market remains of a view the Pound can still rise.

Marek Raczko, an economist at Barclays told clients in a regular weekly foreign exchange strategy briefing that his team maintain a supportive view on Pound Sterling, given the gradual recovery and normalisation of economic behaviour spread over many months.

He does however say much of this news is already baked into the Pound's current levels, "given current GBP levels and lack of market relevant data this week, we expect GBP to move sideways in the near term."

Jeremy Boulton, a Reuters market analyst, has however given a more bullish assessment of the Pound's prospects than most.

"GBP/USD, which broke above two major levels in May, should reach 1.5000 as a result but from there may struggle," says Bolton.

A break higher in GBP/USD could well unlock the door to further gains in other Sterling pairs, for example the GBP/AUD and GBP/CAD which have been been unable to break fresh multi-month highs of late.

"GBP/USD ended May at a close of 1.4215, the highest finish since Britain voted to leave the European Union. GBP/USD closed over the 100-MMA for the first time since June 2014 and above 1.4171 which is 76.4% drop from the pre-referendum peak," says Boulton.

"This suggests GBP/USD will retrace the drop from 1.5022 traded just before news the UK had voted to exit the EU," he adds.

But from this level the Pound is expected to struggle by Boulton as it faces significant headwinds from huge changes in expectations and hedging resulting from Brexit.

He notes that prior to Brexit GBP/USD traded within 1.40-1.70 for years, but ranges dropped substantially due to Brexit and it will take big news to push ranges higher.

"This move, which seems big, will meet the minimum criterion for a correction of GBP/USD's long-term drop if it reaches 1.5137. The peak of the long-term ranges is probably close," he says.

In their latest research and strategy briefing to clients the foreign exchange team at investment bank JP Morgan say they now "see risk-reward value in sterling".

Meera Chandan, FX Strategist at JP Morgan says interest rate expectations in the market should increasingly reflect a view the Bank of England (BoE) will be hiking rates sooner and faster than other central banks.

In their view, under such a scenario the Pound can be expected to rise.

The BoE's willingness to raise interest rates as soon as 2022 is underscored by the prevailing consensus forecast that "the UK will grow faster than any G10 country in the coming six months and, perhaps more importantly, the reality that the MPC’s," says Chandan.

Chandan notes the BoE's Monetary Policy Committee's (MPC) collective rhetoric is already shifting in a more optimistic direction.

She refers in particular to the previous week's comments from MPC member Gertjan Vlieghe that was responsible for a spike in the value of the Pound.

"Vlieghe’s assessment about the reasonableness of a hike in early 2022 in an upside scenario is perhaps more relevant than Haldane’s earlier dissent against QE given Vlieghe’s dovish leanings," says Chandan.

In expressing their conviction that the Pound can rise JP Morgan strategists have advocated buying Sterling against the Japanese Yen in a weekly currency briefing to clients.

This supportive narrative on the Pound and UK interest rates was given further impetus on Tuesday by BoE MPC member

Bank of England Deputy Governor for Markets and Banking Dave Ramsden said in an interview with the Guardian the risk that demand gets ahead of supply and lead to a more generalised pick-up in inflationary pressure.

The BoE will not be complacent and can push its policy rate up, he added.

The BoE is also carefully looking at the housing market and a raft of real-term indicators.

A slower-than-expected recovery – not his base scenario – could dampen inflation.

"Short term money markets already discount the Bank of England being the first amongst majors to start a tightening cycle somewhere mid next year," says Mathias Van der Jeugt at KBC Markets who described Ramsden's intervention as being supportive of the Pound.