Over the past month GBP has outperformed all major currencies, largely thanks to a collapse in the USD. However there seems to be more factors at work with a potential change in global sentiment around the UK currency.
Three key reasons why GBP is outperforming and a potential change in global investor sentiment has occurred:
1) The capitulation of the USD
2) Positive outlook on a Brexit trade deal
3) Better economic recovery than expected
Cable has gone above the 1.32 barrier for the first time since January 2020, largely due to the atrocious Coronavirus situation in the USA combined with a changing outlook in Fed policy. The fact that the Pound has also outperformed all its G10 peers confirms there is more behind Sterling’s performance than the poor USA outlook.
Sterling is not quite skyrocketing – GBP/EUR is only up 0.6 per cent over the past month (see above). Sterling is holding small to medium gains against a host of other currencies – but there does appear to be some genuine backing in the market.
Sterling’s outperformance must also be linked to the Brexit trade negotiation sentiment which has changed its tune dramatically.
EU’s Chief Negotiator Michel Barnier believes a deal will be reached and it appears prime minister Boris Johnson is showing a ‘genuine desire’ to finalise a trade deal as he does not want to compound the Coronavirus crisis with a no-deal economic shock.
The UK has experienced one of the deepest economic contractions in history but the lockdown is now over and a recovery is underway. Some pundits believe that the rebound has actually been underestimated.
As Bank of England Chief Economist Andy Haldane stated: “The foundations for an economic recovery – a rapid one – are already in place, hiding in plain sight.”
The evidence suggests that Sterling’s outperformance in the last month is not just a story of Dollar and Euro weakness.
At Privalgo it is our view that for Sterling to continue outperforming, a variety of factors will be at play:
1) The USD downtrend must continue.
2) Markets and broader investor risk sentiment must stay supported.
3) Markets must remain convinced that despite official briefings, the EU and UK are still chipping away at a deal.
4) The economy’s recovery must continue, and at a rapid rate.
5) Bank of England policymakers must continue to pour cold water on the prospect of introducing negative interest rates.
If these factors continue it would be possible to see cable push closer to the 1.36-plus mark, amongst other things.
In order to mitigate your risk, or capitalise on an overperforming Pound, speak to a Privalgo representative to discuss how we can tailor our approach to maximise your transaction.