The pound is catching up to the dollar as investors strengthen their optimistic positions, possibly gaining momentum from this week's data indicating robust business activity in the UK compared to other developed nations.
Anticipated monthly business activity surveys for February suggest that the UK is positioned at the top, surpassing both the eurozone and even the United States, which has notably avoided economic contraction in the past year.
The concept of "U.S. exceptionalism" has maintained the strength of the dollar and instilled confidence in investors regarding a smooth landing for the U.S. economy. Economists polled by Reuters expect a rise in the UK's business activity index to 52.7 in early February, primarily driven by a significant surge in service-sector activity, reaching its highest pace since last May.
Despite negative growth reported in the UK last year, sterling has only marginally declined against the dollar in 2024, bouncing back from a year-to-date loss observed two weeks ago.
Contrary to predictions just four months ago, where the IMF anticipated Britain to be the slowest-growing economy among the G7 nations in 2024, recent developments, including Germany entering a recession and France experiencing sluggish growth, have shifted perceptions.
The euro has depreciated to a six-month low against the pound, losing approximately 2% of its value since the beginning of the year. Investors have been drawn to the pound's higher yield, expecting the Bank of England to maintain higher interest rates due to persistent inflation.
Weekly data from the Commodity Futures Trading Commission reveals an increase in speculators' bullish sterling position to $3.971 billion by the week ending Feb 13, approaching last July's nine-year high.
Leveraged funds, including hedge funds and money managers, have significantly increased their long sterling positions since December, now holding their most substantial bet on a pound rally since October.
Beyond the pound's yield appeal, investors may find encouragement in recent data. JPMorgan and Deutsche Bank have revised their 2024 UK growth forecasts, with Bank of America expressing bullish sentiment towards sterling and raising its year-end target for the pound to $1.37.
While some caution against excessive optimism, emphasizing the Bank of England's current focus on services and wage inflation, there is acknowledgment that the outlook for Britain's economy is gradually improving, as indicated by ING in a recent note.
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