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 Tuesday 01 August 2017

Cable breaks above 1.32000 - PM Bulletin



Yesterday sterling broke above 1.3200 against the US dollar - a level it last traded at back in September 2016. Back then, cable was on the brink of making another sharp downside break as it approached support around 1.3000. Less than two months earlier the British pound lost around 8% against the US dollar in a single trading session. This followed the surprise referendum result in which the majority of UK voters backed Brexit. Sterling managed to stabilise over the next three months. However, it was unable to hold on to support at 1.3000 as speculation swirled that the Bank of England was preparing to loosen monetary policy again. Then we had the October “flash crash.”  Cable slumped in thin Asian Pacific trade as an incorrect order and computerised algorithms contributed to the currency pair losing over 8% in seconds. It’s still unclear what the lowest traded price was that night.  But suffice it to say the GBPUSD hit its worst level since the early 1980s when it came close to trading at parity. 


A look at the chart above shows that the GBPUSD has been climbing steadily ever since the beginning of this year. Much of this is down to the sell-off in the US dollar which, since early January, has completely reversed its post-Trump election victory rally. Nevertheless, over the last six weeks cable has put in a succession of higher highs and higher lows. And while it’s impressive to see cable break above 1.3200, the more significant move was when it broke and held above 1.3000.

Technically, the next upside target comes in around 1.3400. The area around this level acted as resistance on a number of occasions between July and September last year. In addition, it also marks the 50% retracement of the pre-Brexit vote high of 1.5020 and the generally-accepted low of 1.1800 of the October “flash-crash”.

Fundamentally it’s all about the respective monetary policies of the US Federal Reserve and the Bank of England. So far it’s the Fed which has been tightening while the Bank has kept its easing bias. But investors are looking closely at inflation data from both counties.  Last month the Fed made it clear that it is particularly concerned with the inflationary downturn that has been in place since early this year. Earlier today the Core PCE came in at 1.5% annualised - still somewhat below the Fed’s 2% target. In the current environment this suggests that the Fed is going to be less anxious to tighten monetary policy as it suggested back in June. In contrast, at 2.6% UK CPI is well above the Bank’s 2% target rate and the feeling is that an interest rate hike may be on the cards later this year.


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Posted by David Morrison

Category: PM Bulletin

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