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Pound faces tough battle to reclaim pre-Brexit levels vs dollar

Pound faces tough battle to reclaim pre-Brexit levels vs dollar
Pound faces tough battle to reclaim pre-Brexit levels vs dollar Copyright (c) Copyright Thomson Reuters 2021. Click For Restrictions -
Copyright (c) Copyright Thomson Reuters 2021. Click For Restrictions -
By Reuters
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By Joice Alves and Saikat Chatterjee

LONDON (Reuters) - Five years after the 2016 referendum that dealt it a heavy blow, the pound is less than ten cents below its pre-Brexit exchange rate against the dollar. But making up that final stretch of ground could prove tough.

Currently around $1.41, sterling has staged an impressive rally from a 35-year trough it plumbed last March at $1.1413 and is about 6% below the $1.5022 level it recorded before Britain's June 23, 2016, vote to leave the European Union.

Sterling's rally is partly down to the dollar's weakness; versus the euro, for example, the pound remains 13% below pre-Brexit levels.

Federal Reserve discussions on tapering bond purchases recorded in its latest policy meeting minutes, however, suggest the market cannot count on the greenback remaining weak.

Strategists polled by Reuters expect sterling to remain around current levels until early 2022.

Here are some factors which will determine whether the pound's rally continues:


Britain this week eased restrictions after a four-month lockdown, giving Britons a chance to spend some of the 200 billion pounds ($280 billion) Deutsche Bank estimates they have saved in the past year.

March GDP growth was 2.1%, almost double expectations. The Bank of England forecasts a 7.25% expansion in 2021 versus the 5% flagged in February.

Sterling has already been lifted by Britain's rapid immunisation campaign, but as euro zone vaccination campaigns accelerate, the advantage is fading; April was sterling's weakest month versus the euro since last May.

"I wouldn't propose going long (sterling) because the currency has already priced the UK's relatively quick vaccine roll-out and Europe is now catching up," said Sebastian Mackay, a multi-asset fund manager at Invesco.


Some bet Britain's growth rebound could see the BoE raising interest rates before the U.S. Fed.

This month the BoE slowed the pace of its bond-buying programme, and money markets are pricing in a rate hike by end-2022. Data on Wednesday also showed the inflation rate more than doubled in April from March.


"We know the BoE can turn hawkish on a dime if data comes in stronger," Salman Ahmed, head of global macro at Fidelity International.

The spread of the Indian COVID-19 variant, the economic drag from Brexit and the departure of the hawkish Andy Haldane from the BoE could however delay rate rises.


Following last December's Brexit deal, investment flows to UK stocks have been rising and BofA's survey of fund managers shows allocations are now the highest since March 2014.


Given the backdrop of rising growth and inflation, Britain's equity indexes, heavy on banking, mining and energy stocks, could well suck away investment from tech-dominant U.S. markets. They also trade around 13.8 times forward earnings, well below European and U.S. peers.


U.S. President Joe Biden holds a knife-edge majority in the Senate, Germany's September elections will end Angela Merkel's stint at the helm of Europe's biggest economy, and France holds elections next year.

In Britain meanwhile, Boris Johnson's Conservative party, perceived as pro-business, has a comfortable majority in parliament. He doesn't have to call another election until 2024.


A Scottish independence referendum, potentially risky, is a distant prospect, especially after the Scottish National Party failed to gain an overall majority in recent elections.


The pound still looks cheap. Against trade partners' currencies, it's still 15% below its 40-year average rate.

So investors have been upping bullish pound bets, with net "long" positions at the highest in more than two years at $2.5 billion, according to the Commodity Futures Trading Commission.


But caution may be creeping in. CME data shows heavy recent buying of bearish pound options carrying "strike" prices of $1.40 and $1.32.

($1 = 0.7082 pounds)

(Reporting by Joice Alves and Saikat Chatterjee; Editing by Sujata Rao and Hugh Lawson)

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