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 Tuesday 14 November 2017

GBPUSD testing support - PM Bulletin

 

 

If we only consider headline interest rate differentials, then the dollar should be rallying against the pound.

Sterling, when measured against the US dollar at least, is proving to be quite resilient. A look at a daily chart of the pair shows that the GBPUSD has been in an upwardly-sloping trend ever since October last year. This was when the FX market was thrown into disarray by a “flash-crash” in sterling in the Asian Pacific trading session. Back then cable (GBPUSD) and to a lesser extent other sterling-related pairs went into melt-down after a trading error triggered a cascade of algorithmic sell orders. This came just a few months after sterling slumped following the UK referendum vote in favour of leaving the European Union.  

Currencies aren’t exchange traded so it is difficult to establish just how low cable went that morning. But conventional wisdom puts it around 1.1800 which will have to do - a 6% loss in a matter of minutes. Cable subsequently rallied, trading up to a post-referendum high around 1.3660 back in September, although it has pulled back since then.

We last looked at this chart at the end of October, just a few days before the Bank of England’s Monetary Policy Committee (MPC) vote by 7-2 to hike rates by 25 basis points. This was the first UK interest rate rise in over 10 years and was widely expected. Nevertheless, the resultant sell-off in sterling was something of a surprise. This was a consequence of the Bank forecasting just two more rate hikes over the next three years as MPC members saw inflation topping out relatively soon, militating against a series of future rate hikes. As far as investors were concerned this meant that the rate hike was much more of a “one and done” rather than signalling a series of rises. That view garnered support this morning after headline CPI came in at 3.0% annualised - unchanged on the prior month and below the 3.1% expected.

But we also have to consider the behaviour of the other side of the pair - the US dollar. The greenback has enjoyed a corrective bounce since September after falling steadily throughout the first nine months of this year - at least against the euro. However, it’s beginning to struggle once again. The Fed’s proposed rate hikes (a total of 100 basis points forecast between now and the end of 2018 and dollar-positive) have been factored in for now, while investors have only just started to consider the probability that Trump’s proposed tax reforms face significant delay.

If we only consider headline interest rate differentials, then the dollar should be rallying against the pound. This should lead to a significant breach of the lower trend line shown in the chart below. But so far sterling is managing to bounce off here, and proving to be remarkably resilient given the UK government’s parlous state and uncertainty over Brexit. This is worth watching as cable is fast approaching a breakout point. But we may need to wait a bit longer until we can be sure which way it goes. 

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Posted by David Morrison

Tagged: forex GBPUSD Brexit BoE EURGBP

Category: PM Bulletin


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