Investors are buying back into the pound's pizzazz
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[February 20, 2024] By
Amanda Cooper
LONDON (Reuters) - The pound is playing catch-up with the dollar as
investors beef up their bullish positions, and may get extra oomph from
data this week showing British business activity is among the strongest
in the developed world.
Monthly surveys of business activity this week are expected to show the
UK topped the league table in February, well ahead of the euro zone and
beating even the United States, which in the last year has been one of
the few major countries not to have shown a dip into contraction.
This so-called "U.S. exceptionalism" has kept the dollar buoyant and
investor confidence in a soft landing for the U.S. economy running high.
Economists polled by Reuters expect an index of British business
activity to have risen to 52.7 in early February, led by a surge in
service-sector activity to its fastest pace since last May.
Sterling is down just 0.9% against the dollar so far in 2024, having
clawed back up from a 1.5% year-to-date loss two weeks ago.
Just four months ago, the International Monetary Fund declared Britain
would be the slowest-growing economy among the Group of Seven nations in
2024.
A lot has changed since then, not least Germany tilting into actual
recession and France barely growing. Data last week showed the UK, too,
registered two straight quarters of negative growth last year.
The euro has fallen to its weakest in six months against sterling,
having lost around 2% in value against its cross-Channel rival since the
start of the year.
For the past few months, investors have enjoyed the pound's higher yield
that has derived from the view that, even though the economy is
sluggish, persistent inflation will mean the Bank of England will have
to keep interest rates higher for longer.
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Pound and U.S. dollar banknotes are seen in this illustration taken
January 6, 2020. REUTERS/Dado Ruvic/Illustration/File Photo
Weekly data from the Commodity Futures Trading Commission (CFTC)
shows speculators lifted their bullish sterling position to $3.971
billion in the week to Feb 13, just shy of last July's nine-year
high.
Leveraged funds, which include hedge funds and money managers, have
aggressively added to their long sterling positions since early
December, and now hold their largest bet on a pound rally since
October.
Aside from the pound's yield appeal, investors may be taking heart
finally from the data too.
JPMorgan nudged up its 2024 UK growth forecast in January, while
Deutsche Bank last week said it had made a modest upward tweak to
its quarterly growth estimates.
Bank of America has turned bullish on sterling and last week boosted
its year-end target for the pound to $1.37 - some 8.5% above where
it is trading right now.
In a note last week, ING issued a reminder not to "get carried away"
by signs of green shoots in the economy - the BoE is focused on
services and wage inflation right now - but acknowledged that the
outlook for Britain's economy is starting to brighten.
(Editing by Alun John and Christina Fincher)
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