The Houdini trick of the British pound

Currency markets don't seem to care about Brexit delays at the border and a remarkably calm British route out of lockdown. For now, the British pound is keeping the wind at its back.

The pound was launched in 2021. Against the euro, the British currency has risen by more than 2% in just over 6 months. In addition to a smooth Brexit and a vigorous vaccination policy, better-than-expected economic figures also play a major role in this advance. In mid-February it was announced that the British economy had grown by 1% in the fourth quarter compared to the previous period. That was a big boost, as many economists were counting on a small contraction. Another windfall is that inflation in the past 12 months came in at 0,7%. That is slightly more than the 0,6% of December.

Slowly out of the lockdown
Even when Prime Minister Boris Johnson's plans showed that the country is taking a little longer to roll back all corona measures than specialists were counting on, it was received as good news by economists and currency traders. Johnson sees it as a priority to reopen schools, just like in the Netherlands. He does that on March 8. The opening of unnecessary shops and service providers, such as hairdressers, only happens in April or May. More measures will be gradually rolled back, until the nightclubs will finally open again from June 21th and the festival season can start.

The advantage of opening the economy cautiously, step by step, is that the danger of an additional wave of infections is much smaller. And that outweighs the slow pace in currency markets. Economists are counting on the economy to return to pre-virus levels in the first quarter of 2022.

If you take a closer look, it becomes clear that there are a few things that can be said about the positive messages. For example, the remarkable growth in the fourth quarter was due in large part to a hamster effect. Many Britons have taken a big hit in the final months of 2020 for fear of a chaotic Brexit.

Don't swim against the current
In addition, the smooth trade after Brexit may mainly be a result of the relatively small flow of goods. As trade flows between Britain and Europe increase, the delays increase. A recent survey of 350 UK stock managers found that 2 out of 3 respondents experienced delays in importing goods. In a similar survey in January, that was still 1 in 3.  

But as long as the currency world focuses mainly on the good news, the pound is on the rise and it is too early to take a position for a reversal. Or as it says in Potjeslatijn above the pillars at Amsterdam's Max Euweplein: Homo sapiens non urinat in ventum. A wise man does not pee against the wind.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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