Outlook: Pound breaks $1.43 but where next for sterling?

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FROM THE 26TH JANUARY INTELLIGENCE REPORT: 

Since the end of November, the pound has gone from $1.35 to breaking through $1.43 yesterday, meaning it is close to touching the levels it was seen at prior to the Brexit referendum vote in June 2016. Although at the time of writing the pound had settled down to $1.42. Good jobs data, the increasing likelihood of a Brexit transition period and a weakening US dollar have helped to push up the value of the pound, meaning UK material has cost more for those trading in US dollars. Today’s GDP data for the last quarter of 2017 showed that the UK economy grew by 0.5%, ahead of economists expectations of 0.4%, and has helped to maintain the pound at current levels.

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For those buying material to sell into dollar denominated markets, this has taken away much of the competitive advantage they has, especially when the pound was trading at below the $1.30 level at various points during last year. With the Bank of England Governor Mark Carney also saying in Davos this week that he expects the UK to catch up to the rest of the world, which is experiencing rapid growth, later in the year, the outlook for the pound looks positive. Markets are also starting to anticipate further interest rate rises, and this will also support the pound.

Black Rock Investment head of the global fundamental bond product strategy team Marilyn Watson told Reuters: “When you look at the UK economy, it is on a lower trajectory than what it was before but still healthy. The market is pricing one hike but I think they can hike a couple more times.” However, there are those who think this is a short-term rally, and most of the major investment banks have decided not to adjust their long-term sterling forecasts. For example, UBS is still keeping its 12-month forecast for the pound at $1.36 after raising its three-month forecast to $1.40 this week. While the pound has gained a little on the euro since the beginning of the year, there hasn’t been the same big rise as with the dollar. At the end of 2017, the pound was trading at €1.12, and in the last few days has eased up to €1.14. But with the head of the European Central Bank, Mario Draghi appearing to leave things where they are in terms of interest rates and quantitative easing, there has been more stability in FX.

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