Pound sets the pace among major currencies

The pound turned in the best performance among major currencies on Thursday, gearing up for next week’s Article 50 activation by rallying to its highest level for a month following buoyant retail data.

Having momentarily regained the $1.25 level on Wednesday, sterling climbed a third of a per cent against the dollar after a 3.7 per cent rise in February retail sales, well above analysts’ forecasts.

Sterling was trading at $1.2527 and was 0.5 per cent higher against the euro, pulling the value of the single currency down to 86p.

The latest in what has been a series of twists and turns for sterling this year has seen it rise more than 3 per cent in the past seven days.

Dollar weakness is a major factor behind this good run, as investors reacted negatively to the Federal Reserve’s cautious rate policy outlook and the US administration’s battles with Congress over its legislative agenda.

Barclays anticipated a rebound in sterling from the start of the second quarter. Its analysts expected the triggering of Article 50 to spark “sell the rumour by the fact” investor behaviour, with further support arising from positioning, corporate hedging and the hawkish direction of Bank of England policy.

“Sterling’s exchange value has been depressed to historic levels by a combination of extreme ambiguity and what we believe to be markets’ overestimation of the downside to GBP resulting from Brexit,” they said.

The bank forecast that the pound would end the year worth $1.32, while a euro would fetch 78p.

More sceptical was Brad Bechtel of Jefferies International, who said the BoE was “miles away from hiking”, Brexit negotiations would be messy and may not even start for several months and the impact of Brexit on the UK economy would be “a permanent shock to the system”.

Credit Suisse’s investment committee said it remained positive about the dollar but retained a bullish outlook on the pound and the yen and a bearish one on the euro ahead of the French presidential election.

But Mizuho forex strategist Sireen Harajli predicted the euro would strengthen in expectation of centrist candidate Emmanuel Macron prevailing in the election, the European Central Bank retreating from monetary easing and investment flows returning to Europe.

The euro dropped slightly against the dollar, but has gained 2 per cent this month.

Barclays described the euro as being “close to a turning point” because of sharper inflation and improved data. “A rebound from the excessive pricing of political risk for 2017 introduces upside risks to the EUR in the near term,” the bank said.

However, it added that ECB tightening was already being priced in, while there were downside risks to core inflation and political risks were likely to re-emerge in 2018. Their analysts forecast the euro falling to $1.03 by the end of the year.