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The British pound was sharply higher this morning and looks like clocking up its second consecutive positive session against the US dollar. The rally came as the odds on the UK exiting the European Union (EU) lengthened. This followed the release of an ORB/Telegraph poll which showed that 55% of respondents were in favour of staying in the EU against 40% who want to leave. However, sterling gave back some of its gains later in the session as data showed a dip in inflation during April. Core CPI (excluding food & energy) dipped to +1.2% year-on-year from +1.5% in March. 
   
The rally in sterling was exacerbated by the large risk premium which has been priced into the currency. The pound fell sharply over a three month period from mid-December last year as investors lightened up on their holdings in anticipation of the UK’s referendum on leaving or staying in the EU. A vote to leave is seen as bad for sterling (at least in the short-term).
  
Consequently, as long as this latest poll doesn’t turn out to be rogue, then subsequent market research supporting this result should be positive for sterling. However, investors will be wary of taking the pollsters for granted. Not only did they fail to predict the Conservative majority last summer, but more relevantly, they completely underestimated the “No” vote in the Scottish referendum as well. 
  
It is also worth considering that the UK economy isn’t exactly firing on all cylinders. In fact it’s been stuck in second gear for a while now. The UK may be doing better than a number of her European neighbours but it’s most unlikely that the Bank of England will be voting to hike rates anytime soon. Today’s weak inflation numbers were a further reminder of how inflation is well below the BOE’s target.
    
   
A look at the 4-hour chart for GBPUSD shows support coming in around the 1.4320/30 area. This marks the 0.24 Fibonacci Retracement of the sell-off from June 2015 to February 2016. It will be interesting to see if cable can maintain some upside momentum and break above resistance around 1.4640. This level marks the 0.38 Fib retrace of the same move and the 0.24 retrace of the bigger July 2014- February 2016 sell-off. Both these studies can be seen in more detail in the daily chart below.
  

  
In the meantime there’s the Fed’s FOMC meeting to consider. The committee will announce their rate decision the week before the referendum. So expect a pick-up in volatility over the coming weeks, particularly around polls and economic data releases. 
Quote: Not only did the polls fail to predict the Conservative majority last summer, but more relevantly, they completely underestimated the “No” vote in the Scottish referendum as well.


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Posted by David Morrison

Category: PM Bulletin


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