GBP: Seasonal patterns point towards tendency to appreciate in April - HSBC

In view of the analysts at HSBC, fans of seasonal patterns will point to GBP's tendency to appreciate during the month of April.

Key Quotes

“We are not fans. We retain our view that the best tactical strategy for GBP is to sell it on rallies, reflecting a likely intensification of political risk, the structural headwind of the current account deficit and possible signs of softness in the economic cycle. We have come back close to where we started on our open trade recommendation to sell GBP-USD at 1.2540, but we still believe the trade retains merit. Those not already engaged in GBP may be tempted to wait for better levels to sell, somewhere in the1.2700-1.2850 region where it last topped out.”

“The reality of Brexit is now under way. Although well-flagged in terms of timing, the market now faces the uncertainty of how the negotiations will evolve. We believe the balance of risks early in the negotiations is for hard Brexit to look more likely. The EU has already suggested it is in no rush to begin negotiations, a possible tactic given the fixed timeframe under which the U.K. has to find an agreement. If this were a divorce, the initial salvos would likely be acrimonious with attendant GBP downside.”

“We also believe the boost given to GBP from the hawkish shift in rate expectations is vulnerable to a reversal. The dissenting vote of Forbes at the last MPC meeting came against a run of upside activity data surprises in January and February. Those have now petered out in March with the activity surprise index tracking sideways. For example, the PMIs have been softer, and retail sales are lower 3M/3M despite the pop higher in February. The upside surprise on inflation gave an extra boost to hawks and GBP bulls, but we think it was misplaced. The rise in inflation is a dovish signal under current circumstances because of the squeeze it poses on real spending power. Wages growth is stuck; inflation is not.”

“Thus we think the extra 18bp of tightening the market has added to its expectations for December 2018 are likely to reverse as the data and BOE rhetoric delivers a push back. This will be significant for GBP-USD as the currency has traded as a cyclical currency so far in 2017, tracking the daily vagaries of the interest rate differential between the UK and US. Once the political risk of an early Brexit negotiation standoff and the structural headwind from the current account deficit are added, we could have all three drivers pointing to GBP weakness.”

“One quirk is that our call for GBP weakness in April goes against the historical pattern. For the last 12 years without fail, GBP has rallied against the USD with an average monthly gain of 2.2%. We cannot think of a good fundamental reason for this pattern so are reluctant to rely upon it, not least because the UK is a very different place in April 2017 than it was in previous Aprils. The vote for Brexit was a game-changer.”