Into the teeth of what ought to be adverse fundamental developments, the British pound continues to surprise. The economy is in recession; the BoE is set to resort to a third round of asset purchases; fiscal austerity is working but incredibly slowly; and the trade sector is not contributing to growth in the way expected. And yet, here we are with EUR/GBP back under 0.80, not far from last month’s three and a half-year low of 0.7950. Even cable looks reasonably comfortable at around the 1.56 level, despite the dollar’s continuing status as a preferred destination for safe-haven flows. In the current quarter, only the greenback and the Japanese yen have outperformed the pound.
A number of explanations account for why the pound is still doing relatively well, but from our perspective the following are the most significant. Firstly, strong demand for sterling from European investors and corporates seeking to reduce their exposure to the embattled single currency has been in evidence for quite a while, and this process still has a way to run yet. Secondly, high net worth investors and real money managers in Asia have been keen to diversify some of their wealth into hard currencies and assets, which partly explains why London property prices and gilts are so well-bid. Both motivations have been a very significant source of capital inflow for the pound.
It would not be a shock if sterling continued to surprise in the second half of this year.