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Bloomberg
The pound ended a tumultuous month on a high note on the Brexit day.
Sterling was on course for its biggest weekly gain since mid-December, a day after the Bank of England (BOE) kept interest rates unchanged, supporting the currency.
Analysts expect it to climb more than 1% to $1.33 by the end of June, according to a Bloomberg survey.
Reinforcing the optimism, foreign investors snapped up a record 28.6 billion pounds ($37.5 billion) of UK government bonds in December, data showed. Now with a Brexit deal, the country’s benchmark debt headed for its best month since the June 2016 Brexit referendum, with yields falling more than 30 basis points.
The confidence follows weeks of turbulence as whipsawing bets on whether the BOE would cut rates combined with conflicting data about the health of the wider UK economy. Traders foresee a bright near-term future after the Conservatives’ decisive election victory in December boosted political stability and eased fears of a messy divorce from the EU.
UK government bonds returned 3.6% in January, according to the Bloomberg Barclays Sterling Gilts Index. That’s the most since a 3.7% return in August, which was itself the best month for the securities since June 2016.
With one key risk out of the way the medium-term outlook for the pound remains positive.
The pound was the best performing currency in the Group of 10 economies on the day, even after the UK health department confirmed two cases of the coronavirus in England. It headed for a second week of gains, rose 0.8%.
The costs of inter-bank lending increased as companies adjusted to the BOE’s decision. Three-month sterling Libor fixing jumped 7.2 basis points to 0.76475% last week.
London and Brussels have until June 30 to decide whether to prolong the Brexit transition period by one year or two years. If they don’t, Britain could still crash out of the EU at the end of 2020.
“Strategic longs in the currency remain a difficult proposition, especially as the risk of a rate cut remains firmly on the table,†Credit Agricole SA strategists including Valentin Marinov, head of G-10 foreign exchange research and strategy, wrote in a client note.
But for now the currency is building on momentum that developed after the BOE decision caught half the market wrong-footed.
Volatility is falling and trades that pay out should the pound strengthen are prevailing over bets in the opposite direction, according to two-month risk reversals, a barometer of positioning and sentiment.