UK Plc's M&A Boost to Keep Pound Sterling Afloat

- Strong M&A activity underpins GBP
- Barclays says Covid situation also supportive
- But Rabobank says GBP needs a fresh stimulant

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The British Pound could stay supported for the duration of 2021 should demand for UK assets that has resulted in a surge in Merger & Acquisition activity continue, although near-term the UK currency is in need of a fresh stimulant we are told.

Theta Global Advisors says the UK has banked $343.1BN worth of M&As, which is double the volume of 2019 and the highest since 2000 and signals a significant return of confidence in UK assets.

"With AA motoring group, Asda, Morrisons and Stock Spirits taken over by private equity firms such as CVC, the UK market has recaptured the globe's attention, having seen an unprecedented wave of deals," says Chris Biggs, Partner at Theta Global Advisors.

The Pound struggled in the wake of the 2016 EU referendum and the years that followed as investors and consumers grappled with uncertainty concerning the economic and political outlook facing the country as a result of its transition away from the EU.

However, the completion of Brexit on January 01 has been met with a return in confidence says Biggs, reflected in a jump of M&A activity creating inward investor flows which in turn supports the domestic currency.

"2021 is proving to be a record year for M&As and other kinds of deals as a large amount of uncertainty melts away that has lingered from Covid and Brexit. It is a perfect storm of returning optimism, loosening restrictions and undervalued firms," says Briggs.

Schroders says on average UK companies were being undervalued by around 30% owing to the Brexit risk premium and Covid crisis.

"Investors should see the headline-grabbing bid for British defence company (Meggitt) in context of a persistent and pervasive discount across multiple sectors and individual UK listed stocks," says Bill Casey, Fund Manager, UK & European Equities, at Schroders.

UBS meanwhile reports their proprietary M&A announcement tracker suggests August was another good month for UK inbound deals and find the "Sterling M&A pipeline remains robust."

Above image courtesy of UBS.

"August was another good month for UK inbound deals, which put GBP at the top of the z-score ranking," says Vassili Serebriakov, Strategist at UBS.

Although the inward investment backdrop remains supportive of Sterling, near-term the currency finds itself treading water below its 2021 highs against both the Euro and U.S. Dollar as September commences, suggesting Sterling bulls are in need of fresh stimulus.

Analysis from Rabobank shows that for the Pound to rediscover upside impetus upcoming economic data must show the economic rebound is accelerating following a summer lull.

"The pound is languishing towards the bottom of the G10 performance table on both a 1 and a 5 day view," says Jane Foley, Senior FX Strategist at Rabobank. "There is scope for some further underperformance of GBP vs the EUR near term".

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With regards to the Pound-to-Euro exchange rate outlook, Foley says the 1.1630 area will likely act as "firm psychological" support.

Rabobank hold a year-end target of 1.19 for the exchange rate but Foley says attainment of this target will depend on "better UK economic data".

Analysts at Barclays meanwhile tell their clients in a weekly foreign exchange briefing that UK Covid trends currently appear supportive of the British Pound.

"High vaccination and antibody rates make UK relatively more resilient to activity constraints than elsewhere," says Wen Yan, a foreign exchange analyst at Barclays.

England's Covid cases have now fallen on a week-on-week basis for seven days, although the broader UK tally is prevented from falling outright by Scotland's elevated case load.

There is a risk too that England's cases tick up again as schools return over coming days and mandatory testing is enforced.

But, Barclays' Spend Trends 2.0 data find hospitality spending has recently increased, "consistent with rising diner numbers, suggesting the Delta variant appears less a deterrent to going out".

Sterling is meanwhile expected to remain supported in a "benign risk backdrop" adds Yan, saying U.S. Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Symposium was supportive of investor sentiment.

"The FX market remains focused on the US macro landscape. Here, investors continue to push the dollar weaker in the aftermath of Powell's underwhelming performance at last week's Jackson Hole Symposium," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.

The Pound-to-Dollar exchange rate had been under pressure between May and August, with a low of 1.3602 being attained on August 20. However, a subsequent rebound has seen a return to 1.3792 at the time of publication.

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With the U.S. being a key driver of foreign exchange more generally, all eyes now fall on Friday's release of non-farm employment data where a strong reading could once again boost the Dollar at the expense of the Pound and Euro.

However, a disappointing reading could reaffirm those trends sparked by Powell's Jackson Hole speech; namely a weaker Dollar and outperforming Euro, with the Pound somewhere in between.

The outcome of the reading should feed into market expectations as to when the Fed will go ahead and start reducing its quantitative easing programme (tapering), a precursor to interest rate rises.

"A tapering announcement still seems likely this year," says Rumpeltin, "our expectation for very disappointing US employment report should dash any remaining hopes of an early move."

"Against this backdrop, the USD is weaker against the spectrum of G10 and major EM currencies," he adds.