Pound Sterling in Fresh Advances against Euro and Dollar as Traders Undo the Pessimism
- Written by: Gary Howes
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- GBP/USD hits 10-month best
- GBP/EUR tests key resistance at 1.1450
- Lifting pessimism aids recovery
- GDP forecasts raised at Deutsche Bank
- Rally will be severely tested mid-month
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Investors entered 2023 holding a pessimistic view of the UK economic and political backdrop, but fast-forward to the second quarter and views have improved for the better, offering the Pound a boost.
"We enter Q2 on the back of Sterling proving the best-performing major versus both the USD and EUR across Q1," says Jeremy Stretch, G10 Strategist at CIBC Capital Markets.
The British Pound ended the first quarter with gains against all its G10 peers, spurred on by a series of better-than-expected economic data prints that defy a near-consensus expectation for the economy to have entered recession over this period.
"Catalysts for the relative outperformance proved to be better than expected data, moderating recession risks," says Stretch.
Outperformance has carried over into April with the Pound to Euro exchange rate testing a key level of resistance at 1.1450, a level it has struggled to hold above in 2023.
The Pound to Dollar exchange rate meanwhile broke to its highest level in ten months on Tuesday at 1.2520, with analysts saying this pair looks particularly well supported at this juncture.
Investors held a hefty 'short' position on the Pound entering 2023 amidst near-ubiquitous economist forecasts for the UK economy to slip into recession in the final quarter of 2022 and for negative growth to persist throughout the year.
Indeed, at the time of writing the consensus still anticipates a -0.4% UK GDP outturn for 2023.
But the ONS confirms the UK avoided recession in 2022 as it upgraded Q4 growth and incoming data suggest growth is likely in the first half of this year, too. In fact, only the U.S. grew faster than the UK in 2022 in the Group-of-seven major economies.
With the consensus being tested investors were prompted into covering their short Sterling positions, allowing the currency to rally.
Economic Forecasts Raised
The Bank of England caused a stir in August 2022 when it released forecasts that showed the UK economy was to experience a lengthy recession that would last from the end of 2022 right through to early 2024.
The forecasts prompted a selloff in the Pound and prompted other global and domestic institutions to massively downgrade growth prospects for the economy, adding to a broader pessimism towards the Pound.
But the Bank raised its forecasts in March as it conceded the economy was performing better than it had expected.
Above: GBP/EUR was rejected at 1.1450, again, on April 04. (Consider setting a free FX rate alert here to better time your payment requirements.)
Institutional analysts are following suit and upgrading expectations.
"We now see 2023 GDP no longer contracting," says Sanjay Raja, Senior Economist at Deutsche Bank.
Deutsche Bank this week announced an upgrade to their UK GDP forecasts, saying they now expect a flat outturn whereas previously they predicted a -0.2% reading.
"At 0% growth in 2023, we continue to lead consensus forecasts (-0.4%), which is slowly but surely catching up to us," says Raja.
Supportive Politics
But an improved political environment has also been cited by currency analysts for the improved sentiment towards UK assets.
"The fiscal and political credibility deficit, which proved a function of the Truss political experiment, have largely dissipated," says Stretch.
"The pound ended March as the best performing G10 currency on a year-to-date basis which we believe reflects the degree of pessimism that was priced into the pound following last year’s political instability and the turmoil in the Gilt market," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.
Above: GBP/USD broke to fresh 10-month highs on April 04. (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.)
The government's annual budget set out in March was well received by markets as it confirmed a commitment to fiscal stability while also delivering a number of policies aimed at improving labour supply and productivity, two significant weak spots for the economy.
"PM Rishi Sunak has restored some political stability as has Chancellor Hunt," says Halpenny.
The UK and EU meanwhile agreed on a deal to settle their standoff over the Northern Ireland protocol, bringing an end to a source of uncertainty pertaining to the future of relations with the UK's largest trading partner.
Favourable Seaonality but with a Severe Mid-month Test
Looking ahead, Sterling 'bulls' will be counting on supportive April seasonality to spur further gains, although the currency's gains would likely be whittled down if upcoming data releases disappoint.
The domestic focus will be on the release of UK employment and wage data on April 18 followed a day later by the all-important inflation release.
Should figures come in stronger than expected then the Pound could remain supported into May.
But, a softening in jobs, wage and inflation data would likely prompt the Bank of England to keep interest rates unchanged in May, potentially undoing some of the recent upswings.
