Unexpected UK Growth News to Drive British Pound Sterling Higher in April

“April looks to be shaping up to be a fairly positive month for GBP. While the outlook to a large extent will be driven by events outside of the UK, a couple of traditional fundamental FX strategy indicators have turned more positive. Rate spreads have continued to move in favour of GBP on a trade weighted basis. This is mainly because Euro area rates have been converging on those of the UK. With rate spreads having traditionally had a high and stable correlation with EUR/GBP in recent years, we expect this gap to narrow. Currently, our short-term fair-value model suggests a move down close to 0.80 would be appropriate.” said RBS in a foreign exchange forecast note.

The International Business Times reports that on Wednesday, the Markit/CIPS Purchasing Managers’ Index (PMI) for the services sector rose to 55.3 from 53 in the previous month. Driven by such unexpected growth news Sterling shot up to a two-week high against the euro and cut losses against the dollar.

Earlier this week UK Construction PMI for March rose to 56.7 against the expectation of a drop to 53.4. This revealed that construction activities in Britain have accelerated in March. The Sterling-dollar pair responded to the news by touching highs of 1.6030 level. Manufacturing PMI also touched a 10 month high on Monday.

“What’s particularly encouraging is that this revival of business confidence is encouraging firms to take on more staff. The rebound in the three PMI business surveys suggested that the economy grew by as much as 0.5 percent in the first quarter,” said Chris Williamson, Chief Economist at survey compiler Markit.

According to the mortgage lender Halifax, house prices increased by 2.2 percent in March, increasing expectations that the UK housing market might be stabilising.

Currently pound-dollar pair is at around 1.5904 level and hit a 2-1/2 month high against the euro on Thursday, however, US dollar is also showing signs of having a good month and hence expected gains from the British Pound Sterling is limited.

“When you look at UK data and how cheap the pound is, and look at the re-emergence of periphery concerns in Europe you are going to want to be short euro/sterling,” said Kit Juckes, a Currency Strategist at Societe Generale to Reuters.

However, some analysts are skeptic about gains in pound ahead of the BoE decision. Though signs of a modest economic recovery have reduced the need for more quantitative easing, which can crimp demand for a currency, policymakers would be wary of choking off tentative growth by tightening policy.