Be it Brexit or the global financial crisis, foreign exchange traders have for years bet on a seasonal boost to the British pound in April as a surefire winner in an unpredictable market until this year. For the last 13 years, sterling has consistently risen an average 2 percent in the month of April against the dollar, driven by a variety of factors such as dividends and tax payments. This year too, by mid-April it was up 3 percent .
But that was before Bank of England (BoE) Governor Mark Carney dampened expectations of a May interest rate rise, saying there would be "other meetings" in 2018. Those expectations were all but priced out on Friday when data showed first quarter British growth at 0.1 percent, the slowest in five years. Swap markets now indicate a less than 20 percent chance of a rate increase next month, down from 90 percent in early April.
Since peaking at $1.4377 on April 17, sterling has fallen nearly five percent, heading for an April loss for the first time in 14 years. "Until last week, our April seasonal factor call on sterling was working quite well, but the BoE rate repricing theme has now overtaken that," said Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch, which has put back its forecast of the next rate rise from May to November.
Sharma and other strategists attribute sterling's seasonal buoyancy in April to the end of the UK tax year as well as big dividend payouts by UK companies. A Reuters analysis of historical price data for the pound going back to 1985 shows that a consistent trend of April gains for sterling against the dollar emerges only after 2004. Before hitting its mid-April peak, sterling had notched a year-to-date gain of more than 6 percent against the dollar, but that rise now amounts to less than 2 percent.
The unusual April loss may herald a bigger fall ahead for the British currency. Data from the US Commodity Futures Trading Commission showed net long speculative positions, which had started April at their highest level in four years, posting their second-biggest weekly drop of the last eight months. "The risk for sterling is if the Bank of England comes out and takes off any hopes of a rate hike this year - and that may signal a fresh leg down for sterling," said ING Bank strategist Viraj Patel.