Historically, the British Pound tends to rally in April.
For the last 12 years without fail, GBP has rallied against the USD with an average monthly gain of 2.2%.
The currency has also done well against the Euro.
The observation has many in the analytical industry understandably confident that this April will be no different and that we should therefore expect the UK currency to rise.
But the reasons for this outperformance in April is yet to find any plausible theories and analyst David Bloom at HSBC says he is reluctant to rely upon it and modelling the Pound’s potential direction over coming weeks.
Indeed, Bloom rightly points out that the UK is a very different place in April 2017 than it was in previous Aprils. “The vote for Brexit was a game-changer,” says Bloom.
Bloom does not know why Sterling is favoured by April, but history alone is no reason to suggest this is a set-in-stone rule.
Oliver Harvey at Deutsche Bank says a potential reason for Sterling’s historical outperformance in April relates to dividends.
“After annual reporting in the first quarter, April is often the month when dividends fall due. With over two thirds of FTSE 100 earnings made abroad, cash must be repatriated to pay them,” says Harvey.
Harvey does warn that the divergence between high dividends payments and the declining profitability of UK-listed firms might mean this April’s payouts are limited when compared to previous instances.
The analyst notes that for years now UK corporates have been handing out cash to shareholders at the expense of reinvestment which must at some point be rectified.
As such Deutsche Bank reckon there are many years of underinvestment to catch up with and firms are tipped to hold onto cash which in turn could see less demand for Sterling on global foreign exchange markets.
Added to this, Harvey also notes an increasingly smaller proportion of dividends are being paid back in GBP.
“The share of Sterling dividends is likely to fall further as companies seek to reduce the currency exposure of payouts,” says Harvey. “In short, while the weather is unlikely to improve, sterling’s strong April performance may be less of a factor than in the past.”
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Sell the Pound on Rallies
HSBC have made a tactical recommendation to clients that they consider selling the British Pound on any rallies in anticipation of an intensification of political risk, the structural headwind of the current account deficit and possible signs of softness in the economic cycle.
HSBC have previously recommended that GBP-USD is to be sold at 1.2540 – very close to the 1.2450 seen at the time of writing.
“Those not already engaged in GBP may be tempted to wait for better levels to sell, somewhere in the 1.2700-1.2850 region where it last topped out,” says Bloom.
The tactical call to sell the Pound on strength contrasts to the view held at Barclays that the Pound is a buy against the Euro.
We do note the duration of the Barclays call is however shorter in duration.
Economics to Weigh Against Sterling
Looking at the fundamental reasons to engage against Sterling, HSBC eye the mid-March boost given to the currency by the Bank of England which surprised markets by hinting that the next move on interest rates would be to raise them.
One member of the Bank’s decision-making committee – Kristin Forbes – actually voted for a rise at the March meeting.
But, HSBC believe the boost given to GBP from the hawkish shift in rate expectations is vulnerable to a reversal.
“The dissenting vote of Forbes at the last MPC meeting came against a run of upside activity data surprises in January and February,” says Bloom.
Those have now petered out in March with the activity surprise index tracking sideways with leading indicator data turning softer and suggesting a slowdown in economic activity over coming months.
While the upside surprise in inflation data gave an extra boost Sterling bulls HSBC argue this sentiment is misplaced.
“The rise in inflation is a dovish signal under current circumstances because of the squeeze it poses on real spending power. Wages growth is stuck; inflation is not,” says Bloom.
HSBC think the extra 18bp of tightening the market has added to its expectations for December 2018 are likely to reverse as the data and Bank of England rhetoric delivers a push back.
“This will be significant for GBP/USD as the currency has traded as a cyclical currency so far in 2017, tracking the daily vagaries of the interest rate differential between the UK and US. Once the political risk of an early Brexit negotiation standoff and the structural headwind from the current account deficit are added, we could have all three drivers pointing to GBP weakness,” says Bloom.
Some Bearish Forecasts for the Pound
HSBC forecast the Pound to Dollar exchange rate to be at 1.15 by mid-2017 ahead of a fall to 1.12 by the end of September and 1.10 by year-end.
The EUR/GBP exchange rate is forecast at 0.91 by mid-2017, 0.96 by September and 1.00 by the end of 2017.
From a Pound to Euro exchange rate perspective this equates to 1.0981, 1.0416 and, well, 1.0.
These are certainly amongst the more bearish forecasts in the analyst community out there and aligns closely to the views held at bears Deutsche Bank.
It might be no wonder then that two major Sterling bears are not buying the idea that the Pound will follow historical precedent and rise this April.
At the time of writing the Pound to Euro exchange rate is quoted at 1.1705.
The Pound to Dollar exchange rate is quoted at 1.2480.
Sterling caught its first tailwind of the week against the dollar thanks to data showing the fastest growth in three months for a sector of the U.K. economy that matters most.
Services growth unexpectedly accelerated in March which for now helped to allay worries of Brexit putting a brake on the economy.
Upside for the Pound could prove limited ahead of more big ticket U.K. numbers in the days ahead on trade, due Friday, and next week when inflation and unemployment print on Tuesday and Wednesday, respectively.