Since last week, the pound has started to rally and has been performing increasingly brightly, starting to outperform both the dollar and the euro.
On Monday, the pound rose more than 0.75% and 1.25% against the euro and dollar, respectively, shaking off the downturn seen since April, and continued to rise on Tuesday.
The pound to euro exchange rate rebounded to a daily high of 1.1642 on Monday, the highest since April 7, while on Tuesday, the pound to dollar exchange rate rebounded to a daily high of 1.4008, the highest since March 18.
Why is the pound now regaining favor after its move lower in early April? Let’s take a look at what factors are driving the pound higher.
Seasonal factors could be one of the reasons, with history showing that the pound usually rises at the end of April.
Nomura Securities foreign exchange strategist Jordan Rochester (Jordan Rochester) said.
“Historically, April is indeed the best performing month for the pound. Due to the seasonal impact of April, the upward trend of the pound should be supported.”
Foreign exchange strategists at Barclays said they are confident in the outlook for the pound and will profit from the recovery of the pound against the euro this week.
Analysts at Barclays said in their weekly strategy briefing that they believe the pound has fallen too far recently and recommend shorting the euro to pound exchange rate, setting a downside target of 0.8560. Conversely, the upside target for the pound against the euro is set at 1.1682.
Barclays said that the recent move lower in the pound against the euro has nothing to do with fundamentals, so they expect some rebound.
In the longer term, strategists at Commonwealth Bank of Australia (CBA) are also expecting a rebound in the pound.
In a strategy report published on Monday, the bank said they are targeting a drop in the euro to 0.8 against the pound and a rise in the pound to 1.25 against the euro.
Elias Haddad, senior foreign exchange strategist at CBA, said.
“In our view, there is still plenty of downside to the euro against the pound, which remains heavily overvalued against the pound relative to the levels reflected in real spreads.”
Haddad said the real swap spread between the euro and the pound for 2-year and 10-year is around 0.70.
This week the U.K. will release a series of data that will show that the U.K. economy will likely rebound quickly as vaccination couriers accelerate and the economy reopens.
Outbreak statistics released in the U.K. on Monday showed that only four people died from New Coronary Pneumonia in the last 24 hours, a strong demonstration that vaccination has brought the outbreak under control.
The pound has been bought in recent months as investors bet that the U.K. economy will rebound strongly in 2021.
The key factor driving the rebound is the U.K.’s rapid vaccination program, which has vaccinated more than 60 percent of adults and has convinced investors that the economic reboot will be sustainable.
Sweden’s Nordea Sveriges Riksbank (SEB) said in a research note that the UK’s economic outlook has improved significantly over the past few months due to the successful implementation of the vaccination program, which has led to a rapid strengthening of the pound.
After a three-month lockdown, non-essential stores reopened on April 12, leading to a surge in traffic to the retail destination.
Retail market research firm Springboard said Monday that traffic to retail destinations surged 88 percent in the week ending April 17 from the previous week, more than quadrupling the annual average. This boosted expectations that the U.K. economy would rebound sharply, Springboard said.
“Last week’s increase in traffic meant that the gap between traffic at all major UK superstores and 2019 levels was more than halved in one week, returning to the two months after the 2020 embargo.”
Springboard noted that despite the big improvement last week, traffic is still 25% lower than it was two years ago.
Traffic on shopping streets was down 35 percent from two years ago, while traffic in shopping centers was down 28 percent. In retail parks, the decline was only 2.0%.
Paul Dales, UK economist at Captial Economics, said.
“For the week ending April 10, retail traffic was 65% below the level of two years ago, while for the week ending April 17, traffic was nearly 25% below the level of two years ago. That’s a good improvement.”
Dales noted that the number of people eating at restaurants was double the number of people who ate at restaurants in the week ending April 10 compared to 2019, while restaurant attendance increased significantly in the first week after outdoor dining was allowed, falling just 47 percent short of 2019 levels.
Again, that’s a strong increase in just one week, he said. According to Dales.
“This confirms my point. The reopening of non-essential retailers and outdoor dining venues means economic activity will start to rebound quickly.”
The monthly rate of UK GDP peaked in February 2020 and is 7.8% below that level in February this year. Capitol Macro forecasts that by July, when most sectors are fully open, the monthly GDP rate will be just 3% below the February 2020 level and back to the February 2020 level by the end of the year.
Employment in the UK is also recovering, with UK employers starting to rehire in March as they anticipate a strong recovery in the labor market once the economy reopens. Hiring has picked up in the past few weeks, with data from the UK Statistics Authority showing that the number of job vacancies rose 16 percent in March from a year earlier.
Tej Parikh, chief economist at the Institute of Directors, said that although the labor market is still struggling with the epidemic, there are signs that the situation is improving.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the unemployment rate could fall further in the near future. He believes that the “hidden idleness” of the labor market is relatively small.
British Employment Minister Mims Davies said.
“Unemployment is falling again, job vacancies are increasing and over half a million people entered employment last month, which is good news as we continue to move along the roadmap to recovery.”
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