Pound Sterling off multi-year highs pre-Budget statement

• Pound Sterling (GBP) bullish momentum continues to fade pre-Budget
• British pound to US dollar (GBP/USD) exchange rate falls from multi-year highs
• British pound vs euro (GBP/EUR) currency pair eyeing EUR 1.16 level
• Australian dollar’s (AUD) outlook improves as risk sentiment recovers

Pound Sterling (GBP) has led the march higher against risk-off currencies in 2021, supported by the Bank of England’s (BoE) hawkish stance on the UK’s economic recovery outlook, Britain’s rapid vaccine rollout and UK Prime Minister Boris Johnson’s lockdown exit roadmap.

All of which have fuelled hopes that the UK economy could bounce back from the COVID-19 pandemic-induced economic downturn and record strong growth this year.

However, the British pound (GBP) starts the new trading week off multi-year highs following last week’s profit-taking and some risk-off movement today.

Valentin Marinov, Head of G10 Foreign Exchange (FX) Strategy at Crédit Agricole, believes that pound Sterling (GBP) is in overbought territory and that “many positives have already been priced into the overvalued GBP”.

The British pound (GBP) tumbled alongside a stock market and commodity price rout last Friday, which confirmed the UK currency’s strong correlation with broader investor sentiment.

Given that the British pound (GBP) has moved in tandem with investor sentiment in recent months, risk appetite will likely determine how the currency performs vs the euro (EUR), US dollar (USD) and riskier assets such as the Australian dollar (AUD) over the coming days.

GBP traders will also be turning their attention to Wednesday’s Budget statement from Chancellor Rishi Sunak. Mr Sunak is expected to deliver a sizeable cash injection to the economy to buoy recovery and push back the deadline on support measures such as the furlough scheme, business rates relief and the stamp duty holiday until summer.

Rumours have it that the Chancellor is also eyeing tax hikes to support economic growth. However, it is not yet clear whether currency markets would object to this to boost recovery.

GBP/USD tumbles heading into New York trading hours

The British pound to US dollar (GBP/USD) exchange rate has tumbled by 0.3% and is trading back below the USD 1.40 level at USD 1.3922 at the time of writing.

Although the UK currency is well-positioned to benefit from a renewed bid for risk assets, it starts the new trading week placed behind the euro (EUR) and the US dollar (USD) regarding performance.

The sell-off in the British pound vs US dollar (GBP/USD) pair was triggered by surging US Treasury yields, which jumped higher amid concerns over inflationary pressures.

Although the bond market sell-off has cooled today, some market analysts said that the correction in GBP/USD might be more permanent as UK positives have already been priced into pound Sterling (GBP) exchange rates.

UK health officials have also detected six cases of the Brazil variant in England and Scotland, which could become a cause for concern if the mutation spreads and is resistant to vaccines.

While the infection rate and the number of coronavirus-induced fatalities continue to fall in the UK, GBP bulls will closely monitor flare-ups as new COVID strains have the potential to limit Britain’s efficacy world-leading vaccine programme.

USD traders will likely focus on US stimulus developments, with Joe Biden’s USD 1.9TN stimulus package expected to boost optimism over global economic recovery.

However, positive news from the US could be a double-edged sword for financial markets and pound Sterling (GBP) by discouraging further liquidity from the Federal Reserve (Fed) or prompt committee members to withdraw current stimulus.

That said, vaccine rollouts and expectations that the US stimulus package will boost global economic growth should continue to support pound Sterling (GBP) exchange rates in the near-term.

GBP/EUR eyeing the EUR 1.16 level

While the British pound’s (GBP) is trading off multi-year highs today, the UK currency has maintained gains against the euro (EUR). Pound Sterling’s (GBP) outlook versus the single currency also remains broadly positive.

At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading 0.2% higher at EUR 1.1572 and appears to be eyeing the EUR 1.16 level.

Chancellor Rishi Sunak’s Spring Budget could also present GBP/EUR an opportunity to extend advances, assuming Mr Sunak’s proposal encompasses policies and measures that protect jobs, limit tax hikes and encourage spending.

According to ING currency analysts, the British pound’s (GBP) recent weakness was merely corrective. ING forecast further upside in “GBP, which stands to benefit from the idiosyncratic vaccine dividend and the less dovish BoE.”

However, Crédit Agricole researchers beg to differ as they suggest that GBP is overvalued and a weaker profile is likely over the coming weeks.

Crédit Agricole Modelling revealed that GBP FX fundamentals remain weak compared to other major currencies, citing the UK’s steep economic downturn, substantial deficit, recent stock market performance and low real yields as reasons for caution.

Conversely, ING said that the financial support being announced as part of Rishi Sunak’s Budget “should underscore the constructive outlook for GBP for 2Q, facilitating the economic rebound and making GBP the outperformer in the G10 FX space.”

If the stimulus is well-received, GBP’s outlook against riskier currencies such as the Australian dollar (AUD) and New Zealand dollar (NZD) could also improve.

Australian dollar’s long-term outlook remains skewed to the upside

After recording its sharpest one day jump in a year earlier today, the British pound to Australian dollar (GBP/AUD) exchange rate has plunged heading into the North American session.

At the time of writing, GBP/AUD is trading 0.5% lower at AUD 1.7921, down from AUD 1.8082, triggered by a resurgence of risk appetite, which has renewed demand for the Australian dollar (AUD).

The Australian dollar (AUD) was struggling against all its major trading rivals earlier during the session, including the US dollar (USD), Euro (EUR) and New Zealand dollar (NZD), as rising US bond yields sparked risk-off trade.

However, the “Aussie” dollar is riding the risk-on wave heading into New York trading hours, with lower US yields, higher equity prices and a recovery in commodity prices trigger gains in risk-on currencies.

While global economic recovery hopes could continue to weigh on the British pound to Australian dollar (GBP/AUD) currency pair, AUD could come under pressure following the Reserve Bank of Australia’s (RBA) interest rate decision.

Most foreign exchange (FX) market participants expect the RBA to leave interest rates unchanged at 0.1%. However, dovish comments from policymakers on the outlook of the Australian economy could send AUD lower.

Meanwhile, the UK’s declining infection rate, rapid COVID-19 vaccine rollout and optimism over the Chancellor’s Budget statement could drive GBP/AUD higher in FX markets.