But analysts have warned that this rally will not last. Vasileios Gkionakis, head of global fx strategy at Unicredit Bank, lists three reasons why the rally in sterling will not last.
“Firstly, UK data resilience is, to a large extent, reflecting the global growths pick up and we expect to see more sign of divergence over the quarters ahead as high inflation erodes UK real incomes and confidence,” Gkionakis said in a research note.
Secondly, a more unified stance by the UK government is unlikely to improve Britain’s bargaining position in the EU negotiations – in fact, it is likely to produce more friction with the other side, Gkionakis explained.
Finally, he said “once the French elections have concluded – and assuming that Ms. Le Pen does not make it to Elysee – the political risk premium currently embedded in the euro should be priced out. Based on real rate differentials, EUR-GBP is now trading around 6% lower than it should, most likely due to the election uncertainty in France. So, when the latter is priced-out we would expect a swift reversal towards the 0.88-0.90 range.”
But some analysts continue to remain a little more upbeat about sterling. Philip Shaw, chief economist at Investec, told CNBC via email that he expects sterling to hit $1.35 by year end.
“Our view for a while has been that the risk premium embodied into sterling is excessive and that this will ease back over the course of the year as investors become more comfortable with Brexit-related uncertainties, allowing the pound to strengthen. By end-year, we are expecting cable at $1.35, although this is supported by a wider rally in the EUR vs the USD.”
