Sterling and the dollar: should we be optimistic?

Rumours of the pair’s downfall may be greatly exaggerated, our columnist believes.

GBP vs USD

We reviewed this pairing at the start of January, expressing some optimism for sterling against the US dollar. To our surprise, GBP/USD and the FTSE 100 both opted to start this week outperforming themselves. And as always, the blame was laid on Covid-19.

The thinking, apparently, is fairly simple. The more people are vaccinated, the faster economic recovery should be as lockdown restrictions are eased. Airline stocks will fly again, cruise lines will float off into the sunset, oil prices will bubble up and the hospitality trade shall re-open.

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An important detail, or perhaps an admission of guilt, comes from the UK's economic performance and the country’s near-10% fall in gross domestic product in 2020, the worst performance amongst the G7 group of wealthy nations.

Despite this, sterling is getting strong and the FTSE is starting to show early signs of proper recovery. We'd been expecting a crash, but repeated profit warnings are ‘only’ generating falls in share price of around 6%, rather than the traditional 20%-plus. 

Our thinking had supported a tsunami of share price drops, forcing the FTSE into sharp reversal. This has not happened (so far), due to an outpouring of optimism due to vaccines administered and infection numbers falling. From reading international media, one could almost be convinced we're at the onset of strong bull market conditions!

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Will the FTSE head for 6,900-plus and will GBP/USD demolish $1.5490? We'll deal with the FTSE later this week, but there remains some excuse for optimism with the currency pairing.

Presently trading at around 1.390, the relationship needs to exceed 1.392 to suggest near-term traffic toward 1.406. We anticipate some stutters around such a level, if only due to the relatively huge jump possible to our secondary calculation. Longer term, above 1.406 works out with a target level of 1.4760, matching the high before the Brexit vote trashed the value of sterling.

Experience tends to highlight when a modest initial target appears. It's almost as if the markets demand some volatility before discovering sufficient strength to reach a more distant secondary target.

For it all to go wrong for sterling, the relationship needs to founder below 1.320 to justify early concern.

Alistair Strang has led high-profile and "top secret" software projects since the late 1970s and won the original John Logie Baird Award for inventors and innovators. After the financial crash, he wanted to know "how it worked" with a view to mimicking existing trading formulas and predicting what was coming next. His results speak for themselves as he continually refines the methodology.

Alistair Strang is a freelance contributor and not a direct employee of interactive investor. All correspondence is with Alistair Strang, who for these purposes is deemed a third-party supplier. Buying, selling and investing in shares is not without risk. Market and company movement will affect your performance and you may get back less than you invest. Neither Alistair Strang or interactive investor will be responsible for any losses that may be incurred as a result of following a trading idea.