LONDON: Broad gains for the dollar on Friday halted a recovery for sterling even as it registered its third consecutive week of advances against the euro.
While most banks and investors expect weaker growth and turbulence around talks on Britain leaving the EU to weigh on the pound next year, a number have begun to argue that a 20 percent fall since last December is enough to deal with Britain's large external deficit and help rebalance the economy.
That view helped the pound to a two-month high of 85.26 pence per euro in Friday morning trade.
But it was powerless to resist another broad surge for the greenback following more bullish data on the US economy that added to expectations of higher inflation and more rises in official interest rates next year.
"The broad theme today has been dollar strength," said Craig Erlam, a market analyst with retail brokerage Oanda in London. "It does seem that the bearish appetite on sterling has eased up considerably. It was always likely to come in waves.
Really we are waiting for the economic data to trigger another move, or the triggering of Article 50 (talks on leaving the EU)." Other voices in the asset management community have begun to speak in favour of the pound after a period when shorts in sterling have been at or near record highs.
Analysts from giant asset manager Woodford said in a note that they had reintroduced currency hedging of their US dollar exposure. "We now believe that the weakness in sterling has gone far enough and so hedges were introduced against all remaining foreign currency exposures towards the end of the month," they said.
"As with all investment decisions, this reflects a long-term view - we have no insight into what will happen to sterling on a three-month view, but on a three-to-five-year view, we no longer expect further material weakness in the domestic currency." By 1700 GMT, the pound was a third of a percent weaker against the euro at 85.90 pence per euro. It was 0.7 percent down at $1.2428.
"I do think sterling's fall may have run its course," said Mark Burgess, chief investment officer at Columbia Threadneedle Investments in London.
"We do have to deal with the current account deficit, but you would think this might be enough."
Analysts at Dutch bank ABN Amro pointed to models quoted by the Bank of England's Kristin Forbes in 2014 that suggested a 20 percent decline in the currency would reduce the current account deficit by 2 to 6 percentage points, compared with a deficit that averaged 5.5 percent of GDP over the past four quarters.
"The fall in sterling seen up until now would shrink the current account deficit to sustainable levels," they said in a note to clients on the pound.
"Despite the uncertainty in the upcoming period, we think that sterling is at attractive levels from a long-term perspective. Our new year-end forecast for GBP/USD is 1.25."
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