Pound-Dollar Looks for A Santa Upswing

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Pound Sterling could be set for further gains against the Dollar into year-end with one market professional saying the stage looks set for a 'Santa Rally'.

"Santa Rallies, a phenomenon observed during the holiday season, have intrigued and captivated investors for decades," says Nigel Green, CEO of de Vere Group, the financial services provider.

"Historically, these year-end surges often reflect an optimistic and festive market sentiment," he explains.

The Pound is a pro-cyclical 'risk on' currency relative to the Dollar, meaning it tends to advance in value when market sentiment is buoyant, as would be the case in a Santa Rally.

The Dollar, which has a negative correlation with rising stock markets, would be tipped to fall under such a scenario.

In October, Green predicted that "we’re about to see a year-end rally, which investors would not want to miss out on."

This call has proven accurate, with the Pound to Dollar exchange rate rising in tandem with a stock market rally, advancing 3.87% in November to close the month at 1.2623.

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At the start of December, Green says he now expects the momentum to continue. "It’s likely we’ll see markets experience a Santa Rally taking us to the end of 2023."

de Vere Group attributes a surge in stocks to a plummet in bond yields that's been triggered by increasing signals that central banks, including the Federal Reserve, the Bank of England and the European Central Bank, among others, are done for now with their rate hiking agendas.

Notable examples of Santa Rallies include December 1991, where positive developments in the Gulf War and easing tensions contributed to a market upswing.

In 2018, despite a challenging year, markets experienced a late-year surge attributed to positive trade developments between the US and China.

"The signals are for a Santa Rally as we expect the markets to have steadily more momentum to the end of 2023," says Green.