Pound’s path be­yond $1.30 rests on Brexit talks, growth data and dol­lar strength

Financial Times USA - - MARKETS & I NVESTING - ROGER BLITZ

Ster­ling is worth $1.30 for the first time since Septem­ber, helped over the line by stronger-than-fore­cast re­tail sales data. Its march higher be­gan after the UK elec­tion was an­nounced. So what is the sig­nif­i­cance of the level and will it hold? Was the breach of $1.30 ex­pected? By some. In re­cent weeks, in­vestors and forex an­a­lysts have grown more con­vinced it would break $1.30, un­der­pinned by UK eco­nomic data and weak­ness in the dol­lar, which is suf­fer­ing from Don­ald Trump’s po­lit­i­cal prob­lems. Signs of a turn­round in ster­ling’s for­tunes have also emerged in the past four to six weeks from data on in­vestors’ po­si­tion­ing, which showed bear­ish bets on the pound com­ing off.

But a broader look at the pound shows just how far away from $1.30 ster­ling was look­ing un­til re­cently. Un­cer­tainty over Brexit at the start of the year had driven the pound to below $ 1.20, prompt­ing an­a­lysts to pre­dict fur­ther de­clines by the end of the year. At one stage, $1.05 was a common fore­cast. What was the cat­a­lyst for the rally? Theresa May’s de­ci­sion to hold a snap elec­tion. On the last trad­ing day be­fore her an­nounce­ment, the pound was at $1.25. Her de­ci­sion caused an im­me­di­ate 2.7 per cent gain. To some ex­tent, in­vestors noted, a big­ger Con­ser­va­tive ma­jor­ity would free her to ne­go­ti­ate Brexit with­out the im­ped­i­ment of hard­line Brex­iters seek­ing to cause trou­ble. How­ever, in­vestors were more en­thused about the change in the Brexit timetable that the elec­tion cre­ated. The fear had been that an elec­tion in 2020 — when the next one had to be called by — would put the prime min­is­ter un­der pres­sure to ne­go­ti­ate a hasty and un­sat­is­fac­tory deal by the 2019 dead­line. An elec­tion now means the next one is post­poned un­til 2022, thereby kick­ing the Brexit deal down the road and open­ing up space for a tran­si­tion deal — some­thing in­vestors favour. What has kept the pound buoy­ant? Ex­pec­ta­tions of a hawk­ish Bank of Eng­land. Growth and ris­ing in­fla­tion around the world are prompt­ing in­vestors to fo­cus on pol­i­cy­mak­ing. But UK in­fla­tion is ris­ing too fast for wages to keep pace and will force the BoE to rein in those ex­pec­ta­tions. Gover­nor Mark Car­ney cer­tainly was not en­cour­ag­ing any hawk­ish sen­ti­ment at the BoE’s re­cent meeting. Still, BNP Paribas thinks the pound is un­der­val­ued against the dol­lar, and says “the un­der­ly­ing lan­guage had hawk­ish el­e­ments”, so risks to BoE pric­ing re­main to the up­side. How sig­nif­i­cant is this $1.30 level? Forex hedg­ing ad­vis­ers say the level will be wel­comed by UK im­porters: they have strug­gled to meet bud­gets since the pound’s de­val­u­a­tion, have been re­luc­tant to pass on in­creased costs to cus­tomers and have been fran­ti­cally try­ing to rene­go­ti­ate sup­ply terms and fac­ing hits to profits and mar­gins. The new level at least en­ables them to lock in the $1.30 rate with short-term hedges.

An­a­lysts also ex­pect var­i­ous stop-loss po­si­tions to be trig­gered at the $1.30 level, which would send ster­ling higher. So after $1.30, what’s next? $1.40? That would be a stretch. An­other 10 cent gain for the pound would in­di­cate the mar­ket was con­fi­dent of a sat­is­fac­tory Brexit deal. But there are plenty of other fac­tors ca­pa­ble of hold­ing back the pound, such as a re­vival in the dol­lar and a string of poor UK data. Still, the first of these is look­ing un­likely, de­spite prob­a­ble US rate hikes, while global growth would some­how have to by­pass the UK for the sec­ond sce­nario to oc­cur. Brexit re­mains un­pre­dictable, but there are signs the mar­ket has priced this in, so bad Brexit news may not weigh too heav­ily on ster­ling.

There are an­a­lysts who think ster­ling will get to $1.35 by the end of the year, but there is a bet­ter case to be made around $1.32. In all prob­a­bil­ity, ster­ling will hover around $1.30 for a while yet.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.