Why the Pound Is a Heavyweight

Wonder what is keeping the British pound so strong? It's the British, stupid.

Let's see: a stubborn recession, a downturn in manufacturing activity, quantitative easing by the central bank - these don't really add up to a formula for currency strength. But lo and behold, the British pound is standing tall.

The currency's trade-weighted index "remains near five-year highs in spite of the weakest recorded recovery in U.K. history," says Oliver Harvey, an FX strategist at Deutsche Bank.

What's giving the pound a lift?

Some experts chalk it up to its perceived status as a safe haven, thanks in part to Britain's AAA credit rating and its relative political stability, but Harvey disagrees. Instead, he says, "recent periods of risk aversion have been accompanied by significant portfolio inflows from UK residents repatriating foreign assets."

A global slowdown in M&A activity has also helped the pound, since British firms are making fewer direct investments overseas - reducing their need to sell pounds for other currencies. "The U.K. has been a net beneficiary of over GBP 22bn of M&A inflows YTD, versus last year’s outflow of 20bn," Harvey wrote in a note to clients.

The problem, says Harvey, is that "fundamentals remain debilitating." He's bearish on the pound, and recommends buying the euro against the British currency.

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