The pound is once again shining brightly in FX, with the GBP/USD climbing towards this year’s high of 1.3950ish hit a couple of days ago, with the 1.40 handle now just a spitting distance away. It is not just the cable - investors have been piling into the currency across the board. The EUR/GBP for example is hitting fresh-month lows, while the GBP/CHF has climbed above the 1.25 handle for the first time in before the pandemic.
Rallying pound holding back FTSE -- for now
Pound’s strength has held back the FTSE, but this only a temporary obstacle in my view as conditions remain ripe for UK-listed equities to join the global rally, with the Bank of England even entertaining the idea of negative interest rates, a hint that monetary policy will remain loose for years to come.
Yields, yields, yields…
Like the US,
bond yields in the UK have been rising, especially after a no-deal Brexit was avoided at the back end of last year. The UK is currently well ahead of many countries in the race to vaccinate its population. Together, these developments have boosted expectations that the UK economy could potentially recover quicker and stronger once lockdowns end.
US jobless claims eyed
The GBP/USD has largely shrugged off stronger US data, something which has supported the dollar against haven yen and gold. From the US we have had strong retail sales (+5.9% m/m vs. 1.1% expected), industrial production (0.9% m/m vs. +0.4% eyed) and Empire State Manufacturing Index this week. The focus will turn to jobs market, which remains very soft. Unemployment Claims are expected to print 775K later on versus a disappointing 793K reading the week before.
UK data in focus
From the UK, this week’s stronger-than-expect inflation data has further boosted the pound as rising price levels make it less likely that the BoE will go down the route of negative interest rates. On Friday, we will have the latest retail sales data as well as the flash manufacturing and services PMIs. So, we will have more clues about how the economy is coping during the ongoing lockdowns. But the markets are forward-looking and any softness in data during this lockdown will likely be shrugged off.
Cable set to break 1.40 barrier
The key question of course is can the GBP/USD hit the 1.40 handle next? I think it will. I think it is too close not to hit that hurdle now. Yes, the dollar is strong elsewhere, but the pound is equally as strong, if not stronger, than the USD. While some profit-taking is warranted if it gets to 1.40, the longer-term outlook continues to remain positive for the pound due to the above macro factors. Thus, in a few months we could be talking about 1.50s.
Source: ThinkMarkets and TradingView.com