31 March 2021

Pound’s Rally Can’t Halt Another Weekly Slump as Experts Flag Bumps Ahead

The pound rose strongly against the dollar Friday on economic data showing U.K. retail sales rebounded last month, but cable is set to end a second-straight week in the red as experts flag speed bumps ahead.

GBP/USD rose 0.42%, to $1.3789.

U.K. retail sales rose 2.1% last month following a steep drop at the start of 2021. Looking ahead, retail sales are expected to remain sluggish in March but “before a rebound in sales after non-essential stores reopen in England from 12 April onwards,” Daiwa Capital Market said.

But in the midst of the improving economic backdrop, some experts are betting against the “overvalued” pound, citing post-Brexit U.K.-EU tensions.

“Growing UK vaccine rollout and escalating post-Brexit tensions with the EU to cloud the UK economic outlook even after lockdown conditions are lifted in Q2. The US economy to boom in Q2,” Crédit Agricole said.

The pound has recently moved in tandem with the risk assets, which may prove to be its undoing amid expectations for a bumpy second quarter. As well as an expected souring in risk appetite, forecasts for an ongoing rise in U.S. Treasury yields will boost the dollar, keeping a lid on cable.

“Our analysis suggests that overvalued GBP/USD … fair value of 1.3450 could be one of the best G10 FX hedges against the twin risks of elevated UST yields and risk aversion in the second quarter,” Crédit Agricole added.

Others agree, echoing the positive outlook on the dollar ahead of a crucial week.

“There are very few signs yet that what we see as a corrective dollar bounce has run its course,” ING said in a note.

“On the agenda next week are a few inputs which on paper look dollar positive. The first is the US macro data where the March employment numbers (ADP on Wednesday and NFP on Friday) should be strong.”