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Overall, the upwardly-sloping trend line has pretty much acted as support since March this year, save a brief break below three weeks ago.

duh

Here’s the daily GBPUSD chart which goes back to December 2015 when cable broke below 1.5000. Six months later sterling lurched lower following the referendum when the UK voted to leave the European Union. A few months later we had the “flash crash” which saw cable slump 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 although by any measure it hit its lowest level since the 1980s. But since the beginning of this year, and following Theresa May’s impressive Brexit speech, the GBPUSD has been trending higher. Some of this is down to the sell-off in the US dollar. The current feeling is that the Federal Reserve will hold off from raising rates further this year. In fact, the CME FedWatch tool suggests there may not be another rate hike until June 2018, although the Fed may start reducing its balance sheet before the year-end.

Back at the beginning of August cable was pushing higher and broke above 1.3200 to hit its highest level in twelve months. Sterling subsequently sold off but then picked up and earlier today traded at a fresh twelve month high. Overall, the upwardly-sloping trend line has pretty much acted as support since March this year, save a brief break below three weeks ago. There was a slightly firmer bias to sterling overnight on the news that the UK government won the crucial “Withdrawal Bill” vote. But the real rally came following the release of stronger-than-expected UK inflation data. Headline CPI for August jumped to 2.9% annualised compared to 2.6% in the prior month.

The concern is that this could signal a return to the upward trend in UK inflation that we’ve seen since the beginning of 2016. This in turn would increase the pressure on the Bank’s MPC to tighten monetary policy to dampen down inflationary pressures.

This latest jump in inflation comes just ahead of the Bank of England’s Monetary Policy Committee meeting. On Thursday the MPC will decide whether to hike rates for the first time since June 2007. The consensus view is that the Bank will keep rates steady at 0.25%, where they’ve held since August last year when the MPC cut rates after it forecast an economic catastrophe for the UK after the Brexit vote. Michael Saunders and Ian McCafferty are once again expected to call for an immediate rate hike. This will leave the vote two “for” and seven “against” increasing the Bank Rate. But if they are joined by anyone else, this could see cable make further gains and close in on resistance around the 1.3400/1.3450 area.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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