Deutsche Bank Calls Time on Pound Sterling's Stellar Run

The Pound's run higher is due to pause according to strategists at one of the world's largest primary brokers of foreign exchange.

"Having been bullish on the pound since the start of the year, we no longer think the pound presents attractive risk-reward in the short term," says Shreyas Gopal, Strategist at Deutsche Bank.

Gopal and colleagues have been 'long' the Pound against the U.S. Dollar and Swedish Krona since January but say now is the time to book profit on the trade.

The call comes as the GBPEUR sits on 1.87% advance in 2023, with gains of 4.40% coming for GBPUSD since the start of the year. Deutsche Bank's tacticians say their respective total returns on their long GBPUSD trade yielded a 3.8% gain, with 2.2% being realised on GBPSEK.

In fact, the UK currency has risen against all its G10 peers this year as the UK economy surprised by putting in a stronger performance than was envisaged by the majority of economists at the start of the year.

A look at Citi's economic surprise index offers a neat illustration of how economic surprises can drive a currency's outperformance:

Image courtesy of Reuters.

Gopal says "UK data surprises are far more positive than anywhere else in G10"... but, "a lot of the domestic good news for the UK is now in the price" of the Pound.

"The currency's beta to these prints has started to diminish in recent weeks as the market has now covered its long-held short position heading into the BoE meeting," says Gopal.

Heading into Thursday's Bank of England meeting, Deutsche Bank currency strategists join those that are wary of a downside surprise for the Pound.

"The market is going into a BoE meeting with the terminal rate priced close to 5% for the first time since the two meetings that sandwiched the mini-budget crisis last autumn, and isn't too far away from the zone that prompted explicit pushback from the MPC in November," says Gopal.

"While this latest repricing has been spurred by positive demand data this time rather than any sort of UK risk premium, the risks around the meeting are still skewed towards the MPC erring dovish," says Gopal.

Furthermore, he argues, "recent history is also against the pound. Comparing the reaction of G10 currencies around their respective central bank policy meetings, the BoE have been the standout doves over this cycle."

Analysts at Goldman Sachs have meanwhile upgraded their tactical stance on the British Pound to "outright constructive" amidst a surprising UK economic resilience and fading central bank divergence risks.

"We have been arguing for some time that Sterling's fundamentals have improved, and markets were not fully appreciating that," says Kamakshya Trivedi, Head of Global FX at Goldman Sachs.

In February, Goldman Sachs recommended taking profits on Sterling shorts, arguing at the time that the UK currency should no longer underperform on the 'crosses' (non-USD exchange rates).

The move was an effective upgrade of the Pound from underweight to neutral.

But, now it is time to get bullish.

"We are now taking an outright constructive stance," says Trivedi.

"Essentially, we think that the same factors that acted as headwinds on Sterling in 2022—mostly natural gas prices and the relative stance of BoE policy—have turned to tailwinds," he explains.

Goldman Sachs says "even if the BoE remains in the “reluctant hiker” camp, most other G10 central banks have now joined that group as well, so the case for divergence is less clear".