The pound's rally may have lost some of its steam overnight, but currency analysts are still eyeing the psychological $1.30 mark for sterling against the US dollar this morning.
Sterling hovered around $1.292 against the US dollar in afternoon trading yesterday, before losing as much as half a cent overnight. But if a dovish Federal Reserve disappoints investors tonight, sterling could race past that all-important milestone for the first time since September.
The pound has been buoyed in the last fortnight after Prime Minister Theresa May announced a General Election for 8 June, with some analysts predicting further upside for the currency against the dollar.
The medium-term upside risk for the pound could lead to it hitting $1.37 against the dollar by the end of the year against a shorter-term expectation of $1.32, according to Jordan Rochester, a foreign exchange strategist at Nomura.
An overshoot in the pound could come if the Bank of England reacts positively to strengthening global growth, even before Brexit negotiations are complete, he said.
While the British political class has been distracted by the recent leaks from Brussels on May’s apparently awkward meeting with European Commission president Jean-Claude Juncker, currency traders have been unmoved.
In recent months political developments have been one of the main downward drivers for sterling, but that effect may have dissipated.
Martin Arnold, global foreign exchange strategist at ETF Securities, said: “The worst case scenarios were being priced in to sterling. Now some of that political uncertainty around sterling is being unwound sterling has appreciated.”
The upcoming election could also provide a trigger for further upward movement if, as polls widely predict, the Conservative party wins an increased majority.
Adam Chester, head of economics at Lloyds Bank Commercial Banking, said: “The pound is likely to face conflicting pressures in the months ahead. On the one hand, we believe there is room for the currency to rise further, particularly if the election result fuels market perceptions that the Brexit negotiations will start on a strong footing.”
However, he added weaker consumer spending could impact growth prospects, with the pound ending the year around the $1.30 mark. He said: “We are wary that the UK economic outlook no longer looks quite so supportive.”
The risks to the economy limit the upside for sterling, according to David Stubbs, global market strategist at JP Morgan Asset Management.
He said: “The upside will be fairly capped in the next few months.”
Meanwhile the dollar, seen as overvalued by many economists, could see some selling if the Federal Reserve disappoints investors looking for signs of a coming interest rate hike.
Peter Ashton, managing director at Eiger FX, said: “If the doves hold sway at tomorrow’s Fed meeting then expect cable to push through the key psychological 1.30 barrier."