The pound is only heading in one direction

London

THE pound is sprinting towards the end of 2019 as the world's best-performing major currency, yet there are still plenty of hurdles to continue the rally next year.

After a make-or-break week for markets with the UK election and the threat of more trade tariffs looming, people in the City of London were cheering in the early hours of Friday morning after Prime Minister Boris Johnson's victory and a phase-one deal between the US and China. That cuts two of the big risks for investors.

The pound, which has been dragged down by Brexit risk, surged the most since 2017 after the election result, yet had halved its gains to trade above US$1.33 by the end of London trading on Friday.

Mr Johnson's emphatic victory puts the UK on course to leave the EU next month, after pro-Brexit voters in Labour's former heartlands swung behind his party. He now has a deadline of December 2020 to agree a future trading relationship with the EU, and traders will start to price in that reality, said Marc Chandler, chief market strategist at Bannockburn Global Forex. Many analysts think such a deadline is over-optimistic and will be subject to extensions, continuing some of the uncertainty that has weighed on UK assets.

Traders will also be looking out for the post-election view from a new governor due at the Bank of England, which next meets on Thursday. Policy makers led by current governor Mark Carney are expected to hold rates steady, though in the wake of the election results, money markets pared the probability for an interest-rate cut by August to 40 per cent from 50 per cent beforehand. That came as growth is expected to get a lift from pent-up investment demand and with the government having promised to end a decade of austerity and open up the spending taps.

For Alessio de Longis, a New York-based senior portfolio manager at Invesco Investment Solutions some further downward movement in the pound is to be expected given the sharp move higher.

The currency has gained more than 3 per cent against the dollar this month and more than 4.5 per cent this year, putting it at the top of the pile for major world currencies.

He expects that any pound depreciation will prove just a small blip within a multi-year trend higher for the currency, which should lift it annually on average by about 7 per cent to 8 per cent.

Capital inflows to the UK and its assets, a pickup in global growth and sterling's current 20 per cent undervaluation versus the dollar are key reasons for his views. BLOOMBERG