Pound Surges v Euro, Dollar as M&A Fever Takes Hold

The British pound has powered higher on global currency markets as merger & acquisition action prompts buying interest.

• M&A interest boosts pound

• Scotiabank forecasting a recovery in pound / dollar rate towards 1.51

The GBP was sent nearly a full percent higher against the US dollar in mid-week trade on news that BG Group and Shell are set to merge.

At the time of writing we see the pound to dollar exchange rate (GBP-USD) trading 1.4943.

The pound to euro exchange rate (GBP-EUR) is meanwhile higher by a similar margin trading at 1.3812.

The move higher in sterling-euro is an extension of the move we cited yesterday whereby a base to recent declines in this pairing was due to form.

For both GBP-EUR and GBP-USD we caution that strength is likely to be short-lived as political uncertainty in coming weeks is likely to temper buying interest.

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Sterling’s M&A Delight

Big corporate deals justify massive moves of currency. Sometimes, however, speculators will push the markets regardless of whether the deal in question actually warrants a shift in currency valuations.

Regardless, “Sterling was the darling of the day as Royal Shell announced the takeover of BG Group for about 47 billion pounds in cash and shares. It is unclear how much cross border cash will go through, but it doubtless caused a nice bid for sterling,” says analyst Piet Lammens at KBC Markets.

It is believed the move by Shell and BG Group will create the UK’s largest company.

Analysts also reckon the consolidation of Shell’s position as one of the largest companies in the world puts pressure on Shell’s main rival ExxonMobil.

Will other FTSE names be targeted now the starting gun has been fired?

“The landmark agreement between the two companies not only lent a positive hue to the FTSE, but to the pound as well,” says Connor Campbell at Spreadex.

The deal increases confidence in the significant British oil sector, something that has taken serious knock of late, “and therefore has added to the increasing attraction of sterling this Wednesday,” says Campbell.

British Pound Takes Advantage of Weakness in USD, EUR

While M&A action is driving GBP demand, there is also the issue of weakness in both EUR and USD.

“Comments from the Federal Reserve’s Jerome Powell that the US dollar is causing problems for the US economy left the greenback at the mercy of the pound, which had already been rising this morning on the news that UK food and clothing prices had hit a 9 year low. Wednesday’s dollar-weakness meant that sterling had room to grow against the greenback and compensated for the fact that the pound is undergoing the most uncertain UK election in three decades,” points out Spreadex’s Campbell.

The euro has meanwhile succumbed to the pound as increasing fears of a ‘Grexit’, prompted by today’s meeting between Greece’s Tsipras and Russia’s Putin, left the Eurozone currency in a weakened position.

Forecasting Pound to Head Back to 1.51

We should look through the current rally in sterling against the dollar as being temporary.

“Despite the advance, cable is still prisoner in the narrow 1.4750 to 1.50 range,” notes Lammens.

Political uncertainty leading into the May 7th election remains a near-term weight against the GBP and its impact is set to grow, particularly if the results yield a hung parliament.

However, analyst Camilla Sutton at Scotiabank tells us that there are more fundamental drivers that should keep GBP-USD lower.

The Bank of England faces low inflation (the February print fell to 0%) and vulnerabilities to the euro zone; “accordingly, it is unlikely to enter its hiking cycle until early 2016,” says Sutton.

Investor sentiment remains bearish with March CFTC data reporting a relatively stable -$3 billion short position indicating the markets are overwhelmingly betting on further GBP declines against the greenback.

However, these pressures should prove temporary.

Once an arrangement has been agreed between the various parties following the election results we would expect this risk factor to be taken out of the sterling equation.

Furthermore, “we’d expect the GBP to stabilise later in the year as flows turn positive based on the UK’s relative growth and central bank profiles combined with a positive interest rate,” says Sutton.

As such, Scotiabank hold a GBPUSD year-end forecast of 1.51.