The Pound Roars to Fresh Highs Against Euro, Dollar

Pound Sterling enjoys its best winning run since 2014 - can it extend higher?

The British Pound was one of the best-performing global currencies of the past 24 hours having recorded a new multi-week high against the Euro and a multi-month high against the Dollar.

The impressive advance takes the Pound-to-Dollar exchange rate to 1.3981 on the morning of Tuesday, January 23 - however the highest level reached thus far in the day is 1.4003, which represents a test of a key resistance area and we would not be surprised if selling pressures intensified at this point.

The Pound-to-Euro exchange rate is quoted at 1.1404, it's best exchange rate since mid-December while the overnight high is at 1.1412.

In both instances it appears that momentum is the prime factor behind Sterling's gains as there is little by way of news flow to explain the moves.

"Sterling remained well bid, as was the case at the end of last week. We didn’t see any high profile news on data or on Brexit. The market is becoming positioned quite long Sterling, but for now there is no clear trigger to change course. Dollar softness supports cable," says Piet Lammens, an analyst with KBC Markets in Brussels.

Indeed, we reported earlier that positioning is indeed becoming more positive regarding Sterling with one major institution saying they have seen market participants turn the most bullish on the Pound since the EU referendum of June 2016.

"Riding a multi-week rally, its longest since 2014, the U.K. pound started the week with a tailwind that kept it in its highest orbit since mid-2016. The Pound continues to benefit from the U.S. dollar’s decline and hopes that strengthening global growth would boost Britain’s economy. Sterling carried a 5-week winning streak, its longest in 4 years, into the new week," says Joe Manimbo, an analyst with the corporate desk at Western Union.

Above: GBP/USD could find itself sold around the 1.40 level.

Concerning the immediate outlook, Lammens is backing the British Pound to advance against both the Euro and Dollar further saying the technical picture of EUR/GBP suggests some additional room to the downside if the 0.8810/00 intermediate support area would be broken.

For those looking at this in the Pound-to-Euro format, EUR/GBP at 0.8810/00 gives us a GBP/EUR of 1.1350/1.1363. These levels have been broken at the time of writing but we would look for a daily close above here before getting more optimistic.

Our own Joaquin Monfort meanwhile suggests in his week-ahead forecast that the Pound-Euro rate might be on course to test the 1.15s, more on his views here.

"GBP performance seems to be a continuation of a gradual repricing of Brexit risk premium. We remain bullish on GBP over the medium term," says Jakob Ekholdt Christensen, Chief Analyst with Danske Bank.

Above: Despite recent gains, Sterling is only at the top of recent ranges against the Euro.

Danske Bank are targeting the Pound-to-Euro exchange rate to trade at 1.17 towards the end of 2018 but now acknowledge there are risks that the exchange rate rises faster than previously though and they might have to reassess their forecast.

Regarding the Pound-Dollar exchange rate, the obvious target is the 1.40 level - a big round number that many in the market identify as the most obvious short-term target where they expect heavy selling pressure to emerge as traders book profit.

"Price action suggests that the rally looks a bit tired and we think it may be prudent for short-term players to pare back some risk as cable runs into thick resistance into the 1.38/1.40 area. The 1.3660/1.3720 looks to be credible support for now," says Ned Rumpletin at TD Securities.

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