Published: June 7th, 2023
UBS Bank is advising forex traders to consider long positions on the British pound against the Swiss franc, suggesting a move to 1.14 could be in the offing.
In an analyst note published this week, the bank’s Currency Strategy Unit said the recommendation is supported by solid technical indicators and strong fundamental support.
The note points to an attractive valuation for Sterling against the Franc, and said the previous downward pressure on GBP could be blamed on political uncertainty and investor perceptions that British monetary policy had become somewhat ‘loose’.
That’s all changed, UBS says, because UK politics have stabilised and the Bank of England (BoE) is showing stronger commitment to fighting inflation. These positives have yet to be fully reflected in GBP’s valuation but could become evident before the week's trading session is over.
Key to the long trade recommendation is the timing of central bank meetings in both London and Bern. Both have meetings in the calendar on 22nd June, and UBS believes the trade will perform well as both events draw closer.
Current market consensus is for 100 basis points of additional interest rate rises from Threadneedle Street across the remainder of 2023. UBS says the BoE's resolve to fight inflation has been more steadfast than central banks in other G10 economies.
GBP has tracked higher alongside UK bond yields since the Office of National Statistics published headline inflation of 8.6 per cent in the year to April. That was down from 10 per cent in March, but higher than the 8.2 per cent investors, economists, and analysts were expecting.
In April, Sterling rallied against EUR and USD in early trading the w/c 17th April, following publication of March labour and wage figures that revealed headline wages (including bonuses) rose by almost six per cent in the three months between December 2022 and February 2023.
The UK’s Office of National Statistics said the number matches an upwardly revised reading for February, which overshot the consensus expectations of 5.1 per cent.
A market commentary by Barclays said ‘the recent speculation as to whether softening British wage data might prompt the Bank of England to re-schedule its May policy meeting. This week’s wage print suggests probably not. Sterling has received a modest boost from the data.’
If you exclude bonuses from the calculation, the ONS said pay rose in real terms by 6.6 per cent, also ahead of the 6.2 per cent markets anticipated and unchanged on from 6.6 per cent figure.
Threadneedle Street policymakers would have been looking for a clear signal that wage growth was slowing, in order to be convinced that UK inflationary pressures were dissipating.
The April figures provided enough support for a further 25 basis point rate rise in May. ‘It’s more than just the January wage figure being revised upwards,’ Barclays said. ‘February’s wage data also shot past consensus.’
The Pound to Euro exchange rate moved on expectations for another rate hike, moving up suddenly to 1.1331 in the hours after the data release. The Pound to Dollar rate also rose. Lifting to 1.241 when the figures were published.
In early January 2023 the Pound to US Dollar exchange rate opened the New Year with a strengthening foothold above 1.20, with inflation differentials suggesting it was undervalued below 1.25. American economic data however has been unexpectedly robust this Spring, adding headwinds to any GBP recovery.
US rates lacked a clear direction of travel in the final week of 2022, with price action that saw GBP/USD benefit from a resilient bid for Sterling near the 1.20 handle.
That suggested potential undervaluation for the pair. When bank rate and inflation differentials using a January 2022 starting level of around 1.3506 were considered, analysts said GBP/USD looked a bargain as long as it traded below 1.25.
Markets were bearish on the Pound outlook and prospects for the UK economy, as long as there was a chance that upcoming US economic prints would give investors inspiration for fresh bids for Greenback exchange rates.
‘A Dollar index move through 103.50 could be sufficient to move GBP/USD back through 1.2100, but it’s our view that the pair will finish the week below 1.2000,’ said Barclays in an analyst note.
GBP/USD slid more than ten percent in the latter months of 2022 as gloomy forecasts for Britain’s economy and a reduced pace of Bank of England (BoE) interest rate rises relative to US Federal Reserve kept markets in bearish mode.
Westminster’s plans to reduce financial sector regulation post-Brexit could yet give UK net capital inflows a boost, though there are a number of potential risks which could weigh on Sterling's ascent in the first half of next year,’ added Barclays.
It's worth noting that a lack of UK economic news also gave the American data calendar an outsized impact on the Pound to Dollar rate in the early weeks of 2023.
Back in May 2022 the Pound to Dollar rate found itself under heavy selling pressure as investors ran for cover ahead of US Federal Reserve’s expected quantitative tightening (QT) process and the end of COVID-driven monetary stimulus.
Sterling was trading as low as 1.2412 at its lowest point in the first week of May 2022, as a resurgent Dollar handily beat most G10 majors. In a research briefing, Lloyds Bank wrote that USD's main drivers were evident to anyone who had been watching.
Lloyds also said GBP/USD losses were the result of a policy gap between the US Federal Reserve and the Bank of England (BoE) on rates. American central bankers were pegged to raise interest rates by 50 basis points, even as plans for quantitative tightening were being announced.