Sterling has performed well in recent weeks. In particular, it tested and held a key level in mid-January (at around 1.21 – its late 2023 lows) and has since rallied sharply (+4.4% against the dollar in the past month). As such the currency has started to retrace its losses from the end of 2024 (see Fig 1 below).
Consistent with that, recent newsflow has been encouraging for the bulls. UK GDP, for example, was better than expected in Q4 (& particularly in December); the housing market has started to ‘re-open’ (e.g. with several key leading indicators turning higher*, e.g. see Fig 4); and Trump’s approach to tariffs has been softer than many expected. Last week, for example, he once again delayed imposing tariffs (at least until early April). That generated some general dollar weakness and, with that, GBP-USD closed up 1.7% (on the week).
Adding to that backdrop, and despite the speed of the recent move higher, there’s (still) plenty of fuel for a Sterling rally. In particular, net LONG positions were squeezed out of the market at the end of last year and, as such, the market is now net SHORT (Fig 3). In a similar vein, measured sentiment is somewhat bearish (a contrarian BUY signal), while a number of medium term models have recently been on BUY. Summarising those signals, our Sterling ‘market timing model’ is close to its BUY threshold (see Fig 2). With that models backdrop, and with the UK government shifting its focus towards growth & deregulation (e.g. see HERE), the case for further Sterling upside is therefore reasonably strong.
Fig 1: GBP-USD futures candlestick, shown with 50 & 200 day moving averages
*Albeit stamp duty thresholds will be lowered from 1st April (which is probably bringing forward/boosting housing activity).
Fig 2: Sterling market timing model vs. GBPUSD
Fig 3: Net speculative positioning in GBP-USD futures vs. GBP-USD
Fig 4: Rightmove house prices (Y-o-Y %) vs. RICS housing survey net price balance (advanced 3m, SA)
