How much further can the pound rise?

The pound is the best performing G10 currency in 2018, but can that continue? Martin Arnold, of EFX Securities, is cautious seeing GBP/JPY as the main opportunity.

IG Analyst

2018-01-24T17:50:06+0000

Source: Bloomberg

The pound is leading the pack of G10 currencies so far in 2018, having broken through $1.40. It is also gaining against the yen, but treading water versus the euro.

The pound is now just under the $1.41 level against the dollar, having regained half the dip on the back of the Brexit vote in June 2016.

Will GBP/USD reach $1.50?

Martin Arnold, FX and macro strategist at ETF Securities, is cautious about a GBP/USD climb to $1.50, saying that if the softer retail sales numbers follow through into gross domestic product (GDP) figures, Mark Carney (the Bank of England governor) may be reluctant to be more hawkish, which would bring downward pressure on sterling.

He is more positive about GBP/JPY than cable, and expects the pound to tick higher against euro.

The fact that sterling’s behaviour is tied to volatility and is low at the moment, is a positive for the UK currency, Arnold said.

‘Mrs May seems to be getting her house more in order over Brexit, and there is a more positive tone from some EU leaders over the negotiations,’ he added.

The prime minister had an embarrassing December. After briefings that a Brexit divorce deal was about to be done and how much it would cost, the plan fell through. The Democratic Unionist Party (DUP) in Northern Ireland, who have a ‘confidence and supply’ agreement with the Conservatives (giving them a working majority in Parliament), had not seen the draft text and were not happy with its implications for the Province and the Irish border. In the end, an outline deal was done just in time for EU ministers to allow negotiations to move to the next phase – discussions over the future relationship between the two countries.

A mutually good Brexit deal for the UK and the EU would be more positive for sterling, the FX strategist felt.

EUR/GBP at the mercy of ECB speculation

Though ahead of that, Arnold expects slight movement upwards for EUR/GBP. There have been very good economic numbers out of Europe, and investors expect the European Central Bank (ECB) is going to be quite hawkish in 2018. But, Arnold thinks investors are getting ahead of themselves on how aggressive the ECB will actually be.

GBP/JPY likely to gain ground

As to the possibility of GBP/JPYgaining ground, Arnold said the Bank of Japan (BoJ) was very much still waiting to see, adding that inflation expectations in Japan were still very depressed.

Find out more about why Brexit is important to traders.