The combination of optimistic meeting minutes by the Bank of England (BOE) and the Federal Reserve's (Fed) decision not to taper has led the GBP/USD to continue its bullish momentum and gain over 250 pips in less than 24 hours up until Thursday's retail sales data.
In fact, the sterling pound has been gaining at an astonishing pace. Since the start of the month, the GBP/USD has climbed from 1.5505 to 1.6055, more than an impressive 3.5% gain in less than 3 weeks.
The ride was capped by Thursday's release of worse than expected retail sales data. That economic report took the currency pair down from a high of around 1.6140. The sterling pound has since remained steady and is now consolidating around the 1.60524, holding on to much of the past gains.
According to the Bloomberg Correlation-Weighted Indexes, the sterling pound has risen 5.7% in the past six months, the best performer among 10 developed-nation currencies.
Analysts at Danske Bank say that the retails sales data might be an early warning that the positive surprises out of the UK are about to run out. "That coupled with the current strong EUR sentiment indicates that the GBP
appreciation after [BOE Governor] Mark Carney disappointed the markets early August might be drawing to an end - at least the risk to GBP has now become much more two-sided," they said.
Looking at a longer-term forecast, economists at Capital Economics say that the sharp appreciation in the sterling pound looks overdone and that the pound may fall back over the coming months.
They explain that the gap between expected short-term interest rates in the UK and US have widened recently and was accompanied by the rise in sterling despite the UK's forward guidance. They go on to say that the BOE may keep interest rates on hold until 2017 and could even restart quantitative easing at some point.
"By contrast, even though the Fed held off from announcing a reduction in its bond-buying programme at its FOMC meeting in September, we still think it will be the first major central bank to scale back monetary stimulus," they go on to say.
They believe that such a scenario could lead investors to reassess how quicky rates are likely to rise in the UK relative to those in the US, which could drag down sterling. Nonetheless, monetary policy is expected to remain very stimulative in both countries for an extended period, which should cushion any fall in the pound. Despite the brighter economic outlook in the UK, Capital Economics expects growth to be slower than in the US in 2013 and 2014.
The firm maintains a forecast of $1.50 for the sterling by the end of 2015, but the currrency's recent strength leads it to revise its end-2013 and end-2014 forecasts to $1.60 (from $1.50) and $1.55 (from $1.50) respectively.