Pound bulls emboldened as sterling advances to 1-month high

London - The pound’s biggest rally in 24 years is spurring predictions that the worst is over for the beleaguered currency, at least in the short term.

Scottish money manager Kames Capital is turning "neutral and slightly positive" on sterling after holding an underweight position since Britain voted itself out of the European Union (EU) in June.

Amplifying Global FX Capital says the UK’s improving economy and quickening inflation are boosting the case for higher interest rates and currency strength.

Sterling touched a one-month high against the dollar on Monday, after rallying the most since 1993 on Jan. 17 as UK Prime Minister Theresa May pledged in a speech to deliver "a smooth and orderly Brexit."

She also said Parliament would vote on any agreement with the EU, boosting investor confidence that lawmakers’ scrutiny will ensure a deal that’s favourable for Britain.

"Certainly, in the short term, the worst is over for sterling," Sandra Holdsworth, Edinburgh-based investment manager at Kames, said in a phone interview on January 19.

"We are not talking of a change in trend yet but, in the short term, we are more positive. Sterling is still a positive-carry currency.

The economic backdrop has improved a bit, the expectations for interest-rate cuts have changed."

The pound appreciated 0.7% to $1.2459 as of 7:16 London time, after touching $1.2469, the highest since December 19. That followed at 1.6% rally last week.

It plunged 16% in 2016, the most since the global financial crisis, amid concern Brexit will damage the UK economy and jeopardize London’s status as a global financial centre.

Uncertainty eases

The prime minister’s speech on Tuesday partially removed the uncertainty over government plans and buoyed confidence in the pound, according to Kames, which managed £51.3bn as of September.

In addition, the interest-rate advantage over Europe and the current short-positioning of the market in the British currency are also seen aiding short-term sterling gains, according to the money manager.

Ten-year UK gilts yield about 1.43%, compared with 0.39% on similar-maturity German bunds. British manufacturing grew at the fastest pace in 2 1/2 years in December, according to data published earlier this month.

The UK "continues to show solid economic performance, and inflation above expected, both generating upside risk for rates and the exchange rate," Greg Gibbs, director of Amplifying Global FX in Breckenridge, Colorado, said in e-mailed comments.

"Brexit no longer appears to be a maverick move by a recalcitrant deserter, but an early move in a global trend towards nationalist anti-establishment politics that many countries, especially in Europe, must face."

Still, the outlook is for the UK currency to remain volatile, according to Holdsworth at Kames.

EU Commission Vice President Valdis Dombrovskis said in an interview on Thursday that European institutions "are not giving any statement or taking positions vis a vis the UK government at this stage, because this is now a UK domestic debate."

"Challenges remain as the negotiation for Brexit is a two-way process," Holdsworth said.

"There is not much willingness from European politicians to be very accommodative to the UK in the short term."