Pound Sterling Tends to Appreciate in April

• Seasonal trends shows GBP outperforms in April
• Stock markets tend to rally, USD tends to fall
• But Crédit Agricole warns 2023 could see this trend challenged
• Analysts see GBP/USD supported near-term
• But gains against EUR hard to come by
• UK jobs, inflation data midmonth crucial

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The British Pound could rely on supportive seasonal patterns to take it higher in April with records showing this to be a traditionally strong month for the UK currency due to favourable investor sentiment and flows associated with the FTSE 100, according to analysts.

Research shows the Pound has rallied against the Dollar in nine out of the past 12 Aprils with gains typically coming in between 0.9% and 1.1%, however, pivotal jobs and inflation data due midmonth could yet see the currency record a loss for the month.

The Pound's typical trend of appreciation in April comes at the expense of the Dollar which tends to underperform at this time of year.

Global stock markets meanwhile tend to appreciate: "Over the past 30 years, April has been the best month for the S&P 500 as it was able to rise on average by 2.90%," says Mensur Pocinci, an analyst at Julius Baer, the Swiss private bank.

The Pound has a positive correlation with equity markets and the Dollar has a negative correlation, therefore a bigger picture emerges of a month that typically smiles on investors.

"April has historically been the worst month of the year for the USD vs the likes of the GBP, CAD, AUD & NOK," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

"April has consistently been the best month for GBP and especially GBP/USD which has rallied by nearly 2% on average. Only Brexit has derailed these flows," says Kamal Sharma, a strategist at BofA Global Research.

"The consistency of GBP outperformance over the past 15 years through various phases of the business cycle does indicate that the source of the outperformance is exogenous flow and we think the FTSE 100 is the source," said Sharma in a 2021 note on the subject that remains relevant.

But Crédit Agricole's Marinov reminds us that seasonality is in itself not a trading strategy and previous returns are no guarantee of future performance.

The analyst says any market calm could prove more short-lived than usual this April, which could boost the USD.

"Indeed, with market concerns about the global banking sector abating, the Fed and other major central banks remain on course to hike further because inflation remains sticky and despite potential further deterioration of the outlook for the US economy, which could enter a recession in H223," says Marinov.

Pound Tipped to Outperform the Dollar, but Euro to Remain Supported

Another strong April would come at a point of improved performance by the Pound which starts the new month as the best-performing major currency for 2023 after it delivered a performance that defied the consensus of institutional forecasters.

The Pound recorded its strongest monthly advance against the Dollar in March since November 2022 with a 3.0% advance, which takes the Pound to Dollar exchange rate to 1.2384 at the time of writing.

Shahab Jalinoos, Global Head of Macro Trading Strategy at Credit Suisse, says the Pound benefited in Q1 from a paring of excess short positioning which had built up "due to a strong consensus that BoE dovishness makes it a compelling short".

The Pound was however evenly matched against the Euro in March with both benefiting from economic data that was better than analysts were expecting as lower energy prices worked their way into consumer and business sentiment.

The Pound to Euro exchange rate went as high as 1.1468 and as low as 1.1207, before settling around current levels at 1.1340.

Kit Juckes, Head of FX Research at Société Générale, says there remains scope for the Pound to outperform the Dollar but it should remain evenly matched against the Euro.

"Since the start of November, sterling has tracked 5-year yield differentials, with a narrowing in the UK-German spread of nearly 110bp in November-January taking EUR/GBP from 0.86 to almost 0.90," says Juckes.

"Unless yield differentials narrow significantly from here, we may well find that EUR/GBP becomes dull for a while, trading at 0.87-0.92 over the coming months," he adds.

A EUR/GBP range of 0.87-0.92 gives a GBP/EUR range of 1.15-1.0870.

Above: GBP rose against all its major peers in March 2023.

The Soc Gen analyst says GBP/USD will likely simply track EUR/GBP and make its way slowly back to 1.30. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

Looking ahead, Credit Suisse's Jalinoos sees two-way risks for the Pound based on how the data evolves as this will determine the point at which the Bank of England starts cutting interest rates again.

"The bigger question is how quickly is the BoE able or willing to start cutting rates again once that level is reached. Much will depend on whether UK inflation starts a sharp fall by end-Q2 as the BoE expects. If not, it is hard to imagine such cuts materializing shy of a major financial sector meltdown. This creates two-way directional GBP risk," says Jalinoos.

The key dates for the Pound in April are the release of jobs and wages data on April 18 and inflation on April 19.

The Bank of England has said the prospect of an early-May rate hike that would take Bank Rate to 4.50% rests almost entirely on how these releases look.
Stronger-than-expected releases would potentially boost GBP and weaker data would lead to GBP weaknesses as the odds of a May rate hike at Bank of England would be slashed.

It would also encourage increased pricing for rate cuts further out, which would weigh on the Pound.

"UK inflation remains top of the pack among major economies and still delivering upside surprises, with service prices driving recent gains. While there are many reasons for this, labour market tightness and sharp wage growth are a key element," says Jalinoos.