Capital Economics Ltd. gives the bullish case for sterling as follows:
- The pound has been behaving more like a risky asset than a safe haven one since the start of the pandemic. Indeed, the correlation between the FTSE 100 and the pound has risen sharply since the start of 2020. So even a small further rise in investor sentiment should benefit the pound.
- The rapid vaccine rollout in the UK has improved the economic outlook relative to its peers, especially in the EU. As a result, investors may start to favour UK assets over those elsewhere, putting upward pressure on the pound.
- The Bank of England has recently backed away from using negative interest rates and, based on our forecasts at least, won’t expand its QE purchases. At the same time, the Fed and the ECB are likely to continue with their QE programmes for another year at least. This may push up UK rate expectations relative to those in the US and the EU, driving up the pound.