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Pounds strength not justified.
Published on 13.02.2017 20:44

The British pound has had a good start to the week against its US counterpart, hovering around the $1.25 mark, with some beginning to question the fundamentals behind the recent strength.

At 5.30pm (GMT) the British currency was trading at $1.2500 up from $1.2485 at close of trading on Friday.

The pound has been one of the best performers from the major currencies over the last week, but with so many unanswered questions connected with Brexit there may be danger of a quick reversal.

“Sterling is out-performing on the session; there is little, obvious justification for the relative strength,” says Shaun Osborne, an analyst with Scotiabank.

“No data, no Brexit news beyond last week’s rapid passage of the Brexit bill through the Commons”. he added.

Other news out recently that should have been bearish for the pound was a statement from the Bank of England which seemed to close the door on any rate hikes in the nearest future,

"Expectations for UK rate hikes have been scaled back in the past two weeks, as the market reassess the BOE’s willingness to hike interest rates as political and Brexit uncertainty continue to threaten growth. There is also concern that one of the BOE’s more “hawkish” members, Kate Forbes, is leaving the Bank in June, which could tip the balance in favour of the dovish members”. noted Kathleen Brooks, of City Index.

She also said that the opposite was possible and the central bank may make a move should prices get out of hand and inflation starts to kick in,

“If price pressures are rising at a significantly faster rate than expected, then rate hike expectations could be brought forward, which could see upward pressure on UK bond yields and thus GBP/USD, which could trade back above 1.25, towards the 1.27 highs from earlier this month." she added.

The material published in on this page is produced by the FIBO group companies, and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC; furthermore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Andrew Masters

Analyst

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