Britannia rules thanks to sterling's hot streak

The British pound has reigned supreme against other major currencies even though official figures put the economy of the United Kingdom back in recession for the second time since the onset of the global financial crisis.

Since the end of March, sterling has appreciated 1.2 per cent against the US dollar to $1.6203, 1.9 per cent against the euro to €1.2230 and 1.6 per cent against the Swiss franc to 1.4690 francs.

Even emerging-market currencies have ceded ground against the pound, with the Brazilian real down 5.5 per cent and the Korean won down 1.1 per cent since the end of March.

"At the moment, it's all about sterling," said Neil Mellor, a currency strategist at BNY Mellon. "Let's be clear, the move is against the euro." Despite dismal UK economic data, especially in the construction sector, the return of jitters surrounding the Spanish bond market has led to greater demand for sterling.

Market fears that Germany could be left isolated in its calls for austerity were boosting the pound, said Mr Mellor.

Events expected to attract large numbers of tourists, including the Queen's Diamond Jubilee, Wimbledon and the Olympic Games, are likely to further boost demand for the currency.

Meanwhile, the Bank of England's decision to increase quantitative easing by £50 billion in February to £325bn did little to harm sterling.

Banks are now using the pound as a source of funding in the same way as the Japanese yen had previously been the currency of choice for the carry trade, Mr Mellor said.

Other banks said the poor economic data showed enough signs of life in the UK economy to justify long positions.

"Even a disappointing UK Q1 GDP data failed to deter sterling bulls last week, with the weakness proving very short-lived as Q1 is almost old news now," wrote Audrey Childe-Freeman, the head of currency strategy at JPMorgan. "There is nothing there likely to alter our still-constructive medium-term outlook for the economy, or for the currency."

JPMorgan recommends using euros or Swiss francs to buy sterling when it dips.

ghunter@thenational.ae

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