What has driven sterling higher so far this week?

The pound has rallied sharply versus its major counterparts so far this week. The UK currency surged through the 1.41 level versus the US dollar for the first time since late-February on Monday and has appreciated above the 1.16 mark on the euro to its strongest position in over a month.

But what factors have driven the pound higher in the past few trading sessions and allowed sterling to be among the best performers in the G10 so far this month?

1) No majority for SNP in Scotland - The parliamentary election results in Scotland over the weekend were unambiguously positive for GBP. Nicola Sturgeon once again voiced her intention to force through another referendum on Scottish independence, but with her SNP party falling just short of obtaining a majority in parliament, investors see little risk of this actually coming to pass any time soon.

PM Boris Johnson has continued to dismiss the idea of another referendum less than seven years after the last, and bookmakers are now placing only around a one-in-three chance of one being called before 2025. Indeed, the majority of recent opinion polls suggest that Scots are favouring remaining within the United Kingdom again, after almost every major survey conducted in 2020 showed clear support in favour of independence. Currency traders react unfavorably to uncertainty, so the diminishing possibility of Scottish Independence is being viewed as a clear positive for the UK currency.

2) Bank of England revises UK GDP forecasts higher - Last week’s MPC meeting delivered a mixed message. Only one rate setter voted for an immediate unwinding of stimulus measures and even that was outgoing committee member Andy Haldane, who will step down from the MPC in June. Governor Bailey also suggested that rate hikes were off the table for the foreseeable future, stressing that the bank would look through temporary increases in domestic inflation.

Investors have, however, mostly focused on the positives. The MPC is clearly encouraged by the UK’s rapid vaccination rollout and expects a robust rebound in economic activity once all lockdown measures are removed. Notably, the GDP growth forecast for this year was revised sharply higher (up to 7.25% from the previous 5% estimate), with unemployment only expected to tick modestly higher once the government’s furlough scheme ends at the end of September.

3) UK lockdown easing to go ahead as planned - News on the pandemic front has also been overwhelmingly positive in Britain in recent weeks. The UK’s vaccination programme has been among the best in the world, and that has helped build up immunity levels and drive down both new virus cases and deaths caused by the virus - the latter fell to zero in England, Scotland and Northern Ireland on Monday for the first time since last July.

PM Johnson has confirmed that a further easing of lockdown measures will take place as planned this coming Monday (17th May), including the reopening of indoor hospitality and a relaxation of limits on gatherings. With all measures on course to be removed as planned on 21st June, we are increasingly confident that the UK economy is on course to outperform most of its peers in the near-term, particularly the Euro Area that has lagged well behind in vaccinations.

4) Weak US nonfarm payrolls report - last week’s US labour report was a significant disappointment and this has helped propel the GBP/USD cross to its strongest position in two-and-a-half months.

A net 266k jobs were added in the US last month, which was well below the near 1 million consensus. There was also a fairly sizable downward revision to the March number and a modest uptick in unemployment to 6.1%. This has calmed concerns that the US economy may be close to overheating and that a removal of Fed stimulus may be required in the not too distant future. The Fed’s insistence that no rate hikes are likely until after 2023 undoubtedly presents a bit of a downside risk to the US dollar, in our view, and is a further factor that could drive the GBP/USD cross higher in the near-term.