LONDON — April has been a cruel month for the British pound, with the currency set to decline against the dollar over the period for the first time in close to 15 years.
A combination of factors, from waning expectations of a UK interest rate hike in May, to a resurgent dollar, have helped subdue the pound, which as recently as two weeks ago was being described as the “darling of the currency world.”
Kamal Sharma, a strategist at Bank of America Merrill Lynch, noted at the start of the month that for the last 14 consecutive Aprils, the pound has finished the month higher against the dollar than it started.
“April seasonality is approaching again for GBP, which tends to rally no matter what the political/macro backdrop,” Sharma wrote in late March.
“Within the G10 FX complex, there is no stronger seasonality than in GBP through April.”
“This remarkable outperformance covers major events such as the financial crisis, general elections, and the Brexit referendum, and suggests to us a consistently strong underlying flow which has trumped these idiosyncratic factors,” he added.
With the pound trading at close to $1.44 on April 17, it’s record for having a stellar fourth month of the year looked set to sustain itself, but all of a sudden, Britain’s currency fell off a cliff, and in the 10 days since, has declined by nearly 3.5% against the dollar. On Friday morning in London, the pound is at just $1.3877, and around 0.5% lower than it
The trigger for the initial sell-off in the pound came from Bank of England Governor Mark Carney, who suggested in an interview with the BBC that the central bank may not raise interest rates in May — something that was widely expected in the markets.
“I don’t want to get too focused on the precise timing, it is more about the general path. The biggest set of economic decisions over the course of the next few years are going to be taken in the Brexit negotiations and whatever deal we end up with,” he told the BBC.
“And then we will adjust to the impact of those decisions in order to keep the economy on a stable path.”
Carney then cited mixed data coming out of the UK economy in April as a reason for the bank’s possible reticence.
“On the softer side some of the business surveys have come off. Retail sales have been a bit softer – we are all aware of the squeeze that is going on in the high street. We’ll sit down calmly and look at it all in the round.”
Carney’s comments helped subdue the pound for several days, with further trouble coming for sterling thanks to the recent appreciation of the dollar.
The dollar had seen a virtually opposite story to the pound in 2018 before April, losing ground sharply against all its major rivals. However, in the last couple of weeks the tide has seemed to turn, with the US dollar index — which tracks the greenback against a basket of currencies — rising more than 2% since the middle of the month.
“My best regards to all dollar bears,” Ulrich Leuchtmann, a currency analyst at Commerzbank, and long-term dollar dull said in a note to clients, cited by the Financial Times.
Here’s more from Leuchtmann :
“The amount of ridicule, malice and criticism my colleagues and I had to face over the past months, was overwhelming! Our view that the dollar depreciation in December and January was fundamentally unfounded, that the market would not be able to ignore the dollar-positive arguments forever and that therefore we would see a recovery of the US currency was rejected by many: by readers, by clients, by colleagues.”
The pound’s misery was then compounded on Friday morning when the latest GDP figures from the Office for National Statistics showed the UK economy growing just 0.1% in the first quarter of 2018.
That data, which showed the worst quarter for the economy since 2012, means — in the words of Samuel Tombs of Pantheon Macroeconomics — that the “chance of a May rate hike is now close to zero” from the Bank of England. The pound dropped sharply on the news, as the chart below shows:
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