Sterling edged down on Thursday as end-of-quarter portfolio rebalancing by investors outweighed encouraging economic data, but the currency is still set for its best quarter against the dollar in almost three years. Hopes of a transition deal on Britain's departure from the European Union - which was eventually agreed earlier this month - and growing expectations that the Bank of England could soon raise interest rates have propelled the pound this year to its highest since the June 2016 Brexit referendum.
Sterling is up roughly 3.9 percent versus the dollar this quarter, its best performance since mid-2015. Against the euro it has risen 1.4 percent since January, and is heading for its best quarter since 2016. Some investors believe sterling's good run can extend into the next quarter.
"In the absence of any sudden uptick in UK economic or political uncertainty, we expect sterling to continue on a path of recovery - with a 3-5 percent appreciation in the trade-weighted index," Viraj Patel, an FX strategist at ING in London, said in a note. "The recent move higher is evidence of the pound's cheapness and inverse relationship with Brexit uncertainty," said Patel. On Thursday, the end-of-quarter flows by investors overshadowed data showing a narrower UK current account gap and an upgrade in fourth-quarter business investment.
Dollar strength and the sense among investors that the British currency may have got ahead of itself have undermined the pound's rally this week, and some traders say better news is needed next quarter to justify another leg higher. The pound lost 0.3 percent versus the dollar to $1.4030, bringing week-to-date losses to 0.7 percent.
"The data today showed investment picking up quite a lot in the fourth quarter which makes a more constructive case for the BoE's hawkish tilt, but these kind of figures have to be sustained," said Valentin Marinov, head of G10 FX strategy at Credit Agricole. "On the whole, Brexit concerns have taken something of a backseat since last week and I think markets are focused on data." Data on Thursday upgraded Britain's fourth-quarter business investment to 0.3 percent from flat earlier. Fourth-quarter GDP growth was left unrevised at 0.4 percent while the current account deficit was revised down sharply.
Marinov said he had a broadly positive outlook for the pound next quarter, particularly against perceived safe-haven currencies such as the yen and Swiss franc. But he did not see it rising above $1.41. Versus the euro, the pound fell 0.2 percent on Thursday to 87.64 pence per euro.
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