Does the pound have chances for further strengthening?
The pound rose from 1.35 versus the US dollar at the start of the year to 1.4345 on January 25. Then there was a pullback down, but starting from Wednesday, January 31, GBP/USD once again headed up. As a result, British currency showed in January its best monthly performance since May 2009.
The rise happened because of the several reasons. First of all, the weaker US dollar has been supporting the rise of many currencies during a long period. The pound added than 5% since the start of the year, while the dollar is near its 3-year lows against major currencies. Analysts say that the advance of GBP/USD is more the result of the market selling dollars than buying pounds.
The second reason is positive prospects for a Brexit deal that was supported by domestic economic developments and comments of the Bank of England’s Governor Mark Carney.
The general sentiment about Brexit is positive since the start of the year. The market believes that the country will be able to reach a favorable deal with its European partners. The talks are proceeding with some difficulties though. According to Reuters, EU officials don’t want to allow finance companies to operate in each other’s markets without barriers if Britain leaves the single market. A report was leaked this week that Brexit will bring negative consequences to the UK economy, no matter whether it leaves the European Union with a free trade deal, single market access or without any deal at all.
However, so far positive comments of BOE Governor Mark Carney have shielded the pound from the Brexit-related uncertainty. Sterling rose on Tuesday after he said that the country’s economy has recovered from the financial crisis. Mr. Carney said that private sector is gradually firming and a rise in wages over the next few years appeared to be on track. All this allows the bank to occupy itself with bringing down inflation. As a result, many analysts now think that the BOE will raise interest rates faster than expected. The first 2018 policy decision of BOE will be announced on Thursday, February 8. Before this Services PMI will be released on Monday, February 5.
Some analysts have already changed their long-term forecasts for the pound. For example, HSBC increased the year-end projection for GBP/USD from $1.26 to $1.34. UniCredit now thinks that the pound will end 2018 at $1.49. Their previous estimate was by 9% lower. BMO Capital Markets predicted GBP/USD at $1.45 last October, but, nowadays, they forecast $1.52 if the dollar continues to weaken and the UK economy keeps growing.
At the same time, there are experts who think that the pound has gained too much in the short-term and that this growth is not fully justified. Commerzbank believes that there will be a lot of problems in Brexit negotiations. According to the bank, Carney will recognize Brexit-related risks and will discourage the rate hike expectations next week. That’s why Commerzbank is cautious about buying GBP at the current levels.