The British pound (sometimes known instead as pound sterling) is the United Kingdom's national currency. According to a recent survey by the Bank for International Settlements, the pound remains the fourth-most traded global currency. Specifically, 6% of all foreign exchange trading involves the pound.
Pound sterling is higher against all major currencies except the US dollar today. The British pound is currently the strongest versus the Australian dollar and the Japanese yen. Yesterday, the pound rebounded after news regarding a possible takeover of British pharmaceutical company Shire by Japanese competitor Takeda Pharmaceutical. Significant business investments can temporarily drive a currency higher.
Turning to recent news and events, there are a limited number of developments from the UK driving the currency today. Instead, the pound is trading as a function of international developments. Specifically, the euro is weakening thanks to poor Eurozone growth data, while the US dollar is strengthening thanks to rising US bond yields. While the pound's historically cheap valuation (relative to other major currencies) is one reason to buy the currency, slowing regional growth and US dollar strength is hurting the rally. Our short-term outlook on the pound is now neutral, while our medium-term outlook on the pound remains bullish
GBP/USD is currently above 1.3960. EUR/GBP is down slightly, with the exchange rate above 0.8740. The pound is up slightly against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.8440, while GBP/CAD is above 1.7940.
Looking at this week’s economic data from the United Kingdom, traders will be watching upcoming Q1 GDP growth figures. Public sector borrowing figures for March (-£0.262b vs. £1.600b expected) beat expectations. On Friday, the most important day, we’ll get Q1 GDP growth. We’ll also see GfK consumer confidence for April as well as Nationwide housing price growth for April. Last week, March inflation figures were below estimates while Governor Mark Carney downplayed the possibility of a rate hike in May.
As the pound runs out of steam, we are now neutral on the currency in the short-term. The pound is now trading within normal conditions. This is based on various technical indicators on a daily chart.
As the pound continues to strengthen, we are now bullish on the currency in the medium-term. The pound is now looking trading within normal conditions. This is based on a range of technical indicators looking at a weekly chart.
Policy: Following the Brexit referendum, many expected the Bank of England to extend its zero interest rate policy for many years. Instead, the Bank hiked rates in 2017 following better-than-expected GDP growth and currency devaluation-fuelled inflation. In 2018, expectations for monetary tightening continue to rise thanks to strong regional growth. Looking at politics, Brexit trade negotiations dominate policy implications for the pound. While tangible progress relating to a trade deal with the EU remains limited, expectations are rising that the two sides will eventually close a deal. Pound traders remain hopeful that any future trade deal will give the UK preferential access in the area of financial and professional services exports.
Sentiment: Looking at the Commitments of Traders report, British pound speculators are now net long the currency. In 2017 and earlier, most speculators were net short the currency as markets feared for the worst following the Brexit referendum. In 2018, strong growth in the region is helping the pound recover its fortunes. When pound net positions hit bullish extremes from time to time, the currency is likely to pull back accordingly. Overall, the longer term bull market remains intact.
Economic data: Despite dire predictions, the economy has delivered healthy growth figures since Brexit and has avoided a recession. On the other hand, the weakening of the pound has led to import-fuelled inflation. The most recent figures show inflation surging above the BoE's 2% target. While higher rates of inflation would typically call for higher interest rates, so far the Bank has only delivered one rate hike. Inflation is expected to decrease in 2018 as the pound regains its strength.
The outlook for the pound, while still bullish, is looking less optimistic today. More specifically, factors including the ongoing slowdown in regional growth, lower expectations for a May rate hike, and significant speculator interest in the currency are hampering the rally. Following Brexit, the trade-weighted value of pound sterling (a measure of GBP relative to other currencies) hit an all-t…
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our last take on the British pound in early January, we wrote that the currency was set to keep strengthening thanks to strong regional growth, moderate sentiment and the historically low value of the pound. More specifically, the currency looks cheap based on broad nominal effective exchange rates (a measure of the pound relative to other foreign currencies). Looking at GBP/USD since our last…