Sterling’s strong start to 2021

The pound has enjoyed a strong start to the year, but that isn’t great news for investors.

The pound has enjoyed a strong start to the year, gaining 1.7% against the euro and 0.7% against the dollar so far. One pound currently buys €1.14. Analysts at ING think that figure could reach €1.17 later this year and €1.21 in 2022, writes Petr Krpata. “With the risk of a no-deal Brexit out of the way, the pound is now free to reap the benefits of a faster vaccination rollout”. Sterling’s exchange rate against the greenback – known in investing jargon as “cable” – is also tipped to rise to $1.50 this year, up from $1.38 currently.  

Sterling’s newfound strength isn’t great news for investors. Roughly 70% of FTSE 100 earnings come from overseas, meaning they appear weaker when translated back into a rising currency. That explains why the index has continued to lag global markets, falling by about 0.7% so far this year. By contrast, the FTSE 250, which is less exposed to currency movements, has gained 3%.  

If sterling’s run goes too far then the Bank of England may intervene, says Eoin Treacy of fullertreacymoney.com. Its recent discussion of negative interest rates is arguably part of an effort to “retard the pace” of appreciation, which threatens to erode UK competitiveness. The Bank of England has long been more willing than virtually any other major central bank to devalue the currency in response to crisis. Since the millennium, the pound has lost 29% against the euro and 14.5% against the greenback.

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