Pound Undervalued According to Major Banks

GBP

The pound manged to regain some of the losses it sustained the week before, increasing by 0.3% against the Euro and 0.9% against the Dollar. Though Sterling did suffer a shock at the beginning of the week when the Bank of England’s Chief economist Andy Haldane announced he would be leaving the bank. Haldane was one of the most hawkish members of the monetary policy committee and now markets are predicting there will be a more dovish replacement leading to a delay in any future interest rate rises. Data wise GDP came out slightly lower than expected at 0.4% compared to a consensus of 0.6%, but a far improvement from the previous months reading of -2.2%.

Major banks are now seeing the Pound as undervalued and a lucrative trade versus both the Euro and Dollar, with ING forecasting GBP/USD to be back above 1.40 in the next couple of weeks. The Scottish parliamentary elections take place on the 6th of May in which the appetite for Scottish independence will be assessed. Any hints of a possible 2nd referendum may lead to further weakness for the Pound as uncertainty always causes devaluation in a currency.

Data is going to be key for Sterling this week as it will reinforce the case of a strong economic recovery within the UK especially compared to Europe. The jobs report is the first major data release this week released on Tuesday and is expected a touch higher at 5.2% versus the previous reading of 5%. CPI is released on Wednesday morning and is predicted to increase to 0.7% from 0.4%. Friday will bring both retail sales and services PMI which are expected to benefit from the reopening of the economy.

USD

The Dollar was the worst performing G10 currency last week as the bull run generated from the selloff in the bond markets looks to have come to an end. The Bloomberg Dollar index has looked to have hit the high of 93.44 at the end of March and is now expected to retrace back into the 80s as events in Europe (progress on vaccinations, EU Recovery Fund) play their part in the global recovery story. On the data front the US has positive week with CPI and retail sales both beating the consensus and with only the Michigan Consumer Sentiment Index falling short 86.5 versus expectations of 89.6.

The dollar is expected to weaken as it faces a quiet week on the data front as well as the Fed entering their black out period before the FOMC meeting on the 28th April. Because of this quiet week, Joe Biden is expected to be back in the headlines at his virtual climate summit with world leaders on Thursday. Here he could announce tougher Greenhouse Gas emission reductions which could lead to knock effects within the FX markets as it will hit the fossil fuel exporters and benefits those countries more exposed to copper and aluminium due to their roles in renewable energies such solar and wind.

EUR

The euro had another strong week versus the dollar increasing by 0.6% as the most traded currency pair pushed back towards 1.20. It appears that investors are ignoring the current third wave of Covid in Europe but instead looking ahead and due to the recent increase in vaccinations believe in a European recovery later in the quarter. The single currency has already increased by 2% against both Dollar and Pound but will likely require support from the ECB to extent these gains. The only major data last week from the eurozone came on Monday with a better-than-expected Retail Sales at -2.9% versus -5.4%.

The ECB meeting on Thursday is main talking point for the euro this week. Christine Lagarde is expected try and avoid having to explain the central bank’s reaction to Eurozone debt markets, but this is not expected drag down the Euro. Fiscal stimulus will be the other main topic discussed as EU countries need to submit their spending plans by the end of April and the EU are still waiting on the German courts’ opinion on the EUR750bn EU stimulus plan. The lockdowns imposed last month have started to stabilise Covid numbers in Europe and should help give the euro further support especially against the Dollar. Away from the ECB the only data of note is Markit PMI Composite on Friday expected at 52.8 versus a previous reading of 53.2.