By Barbara Kollmeyer
The pound pushed toward levels not seen in three years on Wednesday, making it among the world’s strongest currencies, though that had a detrimental effect on London stocks.
The pound reached an intraday high of $1.4230 against the dollar, last trading at $1.4110. The FTSE 100, meanwhile, slipped 0.2%, underperforming continental regional indexes, owing to its exposure to multinationals that derive revenue from overseas sales. A strong pound can make those goods more expensive.
The first of three factors that are driving up the pound is the European Union-U.K. trade deal, said Jane Foley, senior FX strategist at Rabobank, in a note to clients.
“More recently the reflation trade started to morph into the vaccine trade and, in view of the U.K.’s swift rollout program, gilts yields rose a little more than their peers. This has lent additional support to the pound. The third part of the bull run can be explained by the more hawkish than expected takeaway from the BoE [Bank of England] at the start of February,” said Foley.
The yield on the 10-year gilt /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y 0.00% was trading just under 0.8%, a level not seen in more than a year. Global bond yields have been rising on hopes that COVID-19 vaccines will restart economies faster than expected.
Foley’s last point has led to the view that negative interest rates in the U.K. are off the table, with markets looking at the potential for higher rates over two years.
As well, she said, there is speculation of pent-up demand in the pound, amid evidence that U.K. investment levels have been low in the last several years due to Brexit uncertainty. But shadows remain on that front, with the services sector largely “out in the cold” and talks outstanding with the financial services sector, along with issues related to red tape at U.K. borders.
Elsewhere in London, shares of heavily weighted energy companies BP /zigman2/quotes/202286639/delayed UK:BP +1.70% /zigman2/quotes/207305210/composite BP +2.94% and Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A +3.40% /zigman2/quotes/206428183/delayed UK:RDSA +2.65% climbed 4% and 2%, respectively.
Lloyds Banking /zigman2/quotes/200709414/composite LYG +1.89% /zigman2/quotes/202285510/delayed UK:LLOY +2.65% reported a nearly halved pretax profit for the fourth quarter of 2020, but said it would resume paying dividends. Shares fell 1%.
Property-related companies climbed after The Times reported that Chancellor Rishi Sunak may extend the stamp duty holiday for three months. Stamp duty is a property tax on buyers. Shares of Land Securities /zigman2/quotes/207145631/delayed UK:LAND +1.91% and British Land /zigman2/quotes/210491538/delayed UK:BLND +2.02% were among the gainers, up 4% each.