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Why bulls and bears are still bashing it out over sterling

UK currency is firmly among the world’s worst performers this year


               A fight is raging in sterling. On the face of it, it is pretty clear who is winning: Team Bear. The UK currency has had a rough start to the new year, dropping from more than $1.32 while the festive champers was still swilling round the market’s system, to under $1.30.That 2 per cent drop puts the pound firmly at the lower end of the major currency rankings for the year. Only the Australian and New Zealand dollars have performed more poorly against the US dollar since 2020 got under way. It is not hard to see why. Firstly, the pound enjoyed a huge resurgence at the end of last year. As soon as the contours of an agreement over the UK’s exit from the EU became clear in the autumn, the pound rocketed, and the emphatic general election result in December added fuel to that rally. But beyond that, unless you take the minority view that leaving the world’s largest trade bloc can provide an immediate economic boost, it is hard to see what could take sterling back beyond $1.35, for the first time in almost two years. Secondly, with a lot of good news already baked into the price, the bad news started to land. Bank of England rate-setters, including Michael Saunders, Gertjan Vlieghe and outgoing governor Mark Carney, have all expressed varying degrees of dovishness. The economy shrank in November, data released this month showed, and inflation has proven to be flimsy. Investors are listening, shifting to anticipate a cut to UK interest rates. A 70 per cent chance of a trim next week is now priced in.But the plucky bulls are not giving up. Quite the opposite in fact. In the futures market, speculators have accumulated the largest pile of positive bets on the pound since April 2018, judging from the latest weekly data released on Friday. Such figures are often seen as a decent guide to what speculators such as hedge funds are up to as a whole. “The UK remains fascinating to markets, with bulls and bears bashing it out,” said Kit Juckes, an analyst at Société Générale.What can these speculators see that the rest of the market cannot? At a Goldman Sachs event in London last week, strategist Kamakshya Trivedi laid out why he thought the pound was the best major currency to buy against the dollar this year. The dovishness that had built up was misplaced, he said. Brexit uncertainty is easing, inflows of investors’ money have resumed, and data on the country’s businesses, especially the closely watched purchasing managers’ indices, are likely to bounce.No pressure, but the first estimates of those PMIs are due on Friday. Consensus forecasts show that economists are expecting a pick-up after December’s worryingly drab performance. If the figures fail to provide it, the heroic bulls could stampede to the exits.

Source: Katie Martin/FINANCIAL TIMES

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