April is usually a strong month for GBP. Due to the UK tax year’s end at the beginning of April, large corporations domiciled in the UK bolster demand for the UK Pound when repatriating overseas profits. This real money flow tends to provide a significant and tangible bid in GBP that sees the spot price outperform. Until yesterday at least, April had not been kind to the Pound with its major crosses continuing to leak value at a moderate yet steady pace across the board. Yesterday, however, Sterling reared up gaining almost two cents versus the US Dollar within the European trading session alone. So have FTSE100 giants finally balanced their books and started bringing their cash over?!
In truth it is highly unlikely that yesterday’s rally in GBP was the result of large corporates brining overseas profits back to the UK. One reason for the limited real money flow from overseas earners this month is the very lack of foreign profits. Whilst pharmaceutical companies may have secured sales overseas, the intra-pandemic tax year of ‘20-‘21 was typically not one of star studded international sales. Due to the political shift associated with Brexit too, capital allocation overseas in sectors from financials to industrials has risen possibly reducing the desire to repatriate profits.
So if a rose-tinted April is not on the cards this year, what then was behind the rally in GBP yesterday? Well, the first thing that kicked GBP in the right direction was positioning data that was released over the weekend. Many market participants had expected the falling GBP in the last week or so to be a result of investors losing conviction and confidence in their long-Sterling positions. Accordingly, it was widely expected that this positioning data would confirm further consolidation in the net-long GBP position within the speculative portion of the market. What was released showed quite the opposite with GBP long positions being added to in significant volume suggesting some floor to the speculative unloading of Sterling.
Secondly, UK vaccinations have continued at pace with evidence suggesting that the lack of AstraZeneca doses is not having a devastating impact of the UK’s ability to inoculate its population. This did and will continue to provide support once again to the Pound. So too the safety concerns associated with such vaccines that are gathering pace internationally have not deterred the UK population it seems from offering up their chosen arm.
Yesterday’s rally also corrected recent GBP weakness ahead of a data heavy week. Should data released this week surprise to the upside or demonstrate a more resilient recovery in the UK economy, GBP could have room to move considerably higher. Key events to watch out for include employment figures today, CPI inflation tomorrow and retail sales to end off the week. Remember, that given the period in question barely covers the opening up of the economy and will cover a period ahead of the pent-up consumer demand that has been recently released on non-essential retail, a data-driven rally could still be some periods off.
Discussion and Analysis by Charles Porter