Sterling hit a high note at the start of this week, rising to a fresh 5-year high although it has met some resistance around 1.6850 as we move towards the US session.
The key drivers include:
- Pfizer Inc (PFZ.LONDON) confirmed it had made a formal bid for Astrazeneca Plc (AZN.LONDON) at the weekend. This is the second time since January, and the latest offer includes a chunky premium on January’s price. This deal is expected to be one of the largest ever in pharma history and since a portion of the deal is likely to be in cash, sterling has been a chief beneficiary.
- Anticipation of a strong GDP report from the UK on Tuesday.
- General US Dollar Index weakness.
The Pfizer / Astrazeneca offer is the most interesting, in our view. There could be a wave of cash-based deals from US firms due to onerous tax rules in the US that charge US companies extra tax on earnings overseas. Thus, it can be more prudent to spend the cash buying up rivals rather than repatriate earnings and get charged tax on them.
Why does this matter for sterling? The UK is considered a less hostile environment for foreign-takeovers compared to some countries, which could make the UK the go-to destination for big US corporates with cash to spend. The results can boost sterling.
Now that Pfizer has made public its interest in Astra Zeneca, it has until 25th May (according to UK Takeover Panel rules) to firm up the deal or walk away. Thus, there could be another 4-weeks of speculation that could limit GBP/USD downside during that time.
From a sterling perspective, the biggest risk from this deal is that it doesn’t go through, which could weigh on the pound in the long term. Thus, we will be watching for any statements from Astra Zeneca to see if they are happy with the offer or are more likely to turn it down.
Other factors that could boost the pound:
Domestic fundamentals alongside technical developments could also be important for the pound in the coming days:
- UK GDP: the market is expecting 0.9%, the BOE is slightly more optimistic and is predicting a 1% quarterly increase in growth. If the BOE is correct, this would be the fastest pace of growth since June 2010. While we think that much of the good news on the growth front may have already been priced in, any upside surprise (growth of 1% +) could see another wave of sterling strength.
- From a technical perspective, 1.70 is now in view. It is a key resistance level from a psychological standpoint (the fastest pace of growth since August 2009) and the top of the monthly Ichimoku cloud lies at 1.7091. This could thwart the pound’s momentum as it is a major resistance level that could trigger profit-taking.
- The latest CFTC positioning data also shows that long interest in the pound could be starting to wane as we approach 1.70. Long positions actually fell last week, although this could have been due to low volumes caused by the Easter holiday.
Looking ahead, M&A activity could be the key driver for sterling upside in the longer term, so FX traders should keep an eye on corporate headlines.
In the short term, comments from Astra Zeneca are worth watching; if it sounds hesitant about the Pfizer deal then sterling could come under pressure. Tuesday’s GDP data is also crucial. A number above 1% could boost sterling, while a data miss could trigger some weakness.
With headline and event risk mounting, the next move for the pound is uncertain. It is starting to look overbought on the daily charts (the RSI is approaching 70), so it is worth getting acquainted with key support and resistance levels: including:
Resistance:
- 1.6878 – November 2009 high.
- 1.7091 – the top of the monthly Ichimoku cloud.
Support:
- 1.6661 – April 15th low.
- 1.6556 – low from 4th April.
Takeaway:
- M&A news could sustain sterling strength in the coming months.
- These deals are a long-process, that sterling downside could be limited while it is on-going.
- If Astra Zeneca rebuffs Pfizer’s move this could be a risk factor for the pound.
- The technical signals suggest that the pound is looking a bit stretched and we could see some profit taking as we get closer to 1.70.
- Watch UK GDP data, as this could determine the short-term direction of the pound on Tuesday.
