Morning Brief – GBP Call

GBP Call

GBP has fallen in a controlled and predictable fashion since its peak right at the beginning of June. The rejection of tighter monetary policy at the bank of England and approaching technical resistance levels north of 1.40 on GBPUSD sealed the short-term fate for Sterling. Now approaching a fragile but extant price floor, this could be the time for a reversal on Sterling’s major crosses and retest of these recently rejected highs. The case for a stronger near-term pound seems to be building. Here’s how it could play out.

Technical – Prices

A support level had been established around a key technical level of 1.3775. This level was significant given price action earlier in the year. Whilst more significant levels of technical resistance were to be found around 1.3700, evidence of sustained GBP selling amidst rising concern over the global prevalence of Covid variants saw prices push through these levels. These technical levels may not protect GBP against a strong sell off in and of itself and it is likely that the more significant technical levels in the 1.36s provide greater support. Nonetheless, from a technical price-only perspective there is more headroom within GBP crosses than there is room to fall.

Fundamental – ex Prices

The case to be bullish on GBP has seldom been stronger. Growth forecasts and data continue to outstrip previous forecasts highlighting the pace with which the UK economy is closing the output gap created by the pandemic. Whilst unemployment data has been stubborn likely emphasised by the UK’s concomitant political shift (Brexit) macroeconomic aggregates remain strong. The vaccination programme has supported to date the UK’s economic reopening plan. In turn, the prospects of a more active and open economy should prove to be constructive to higher GBP valuations. Stresses in the financial system seem limited and well contained whilst the price inflation level normalises. Above all else, the hawkish turn by several members of the monetary policy committee following the disappointment created by June’s Bank of England meeting could signal a changing tide for GBP. As recently as last week, fresh signals emanated from members of the Monetary Policy Committee suggesting the Bank’s dovish tilt could be turning a corner.

The whole picture

Prices remain accommodative within GBP crosses so as not to stifle economic output nor deter investors from holding long GBP positions. Whilst still deeply negative, the real yield behind GBP is not sufficiently negative to seal it’s fate at the funding currency for the summer period carry trade. From a fixed income perspective, key to predicting the demand behind any currency, falling yields further along the US yield curve should close the gap between the US and UK with respect to capital allocation decisions. Most importantly, the higher probability of the Bank of England adjusting its bond purchase programme or changing its forward guidance to usher out hyper-loose monetary policy should allow GBP demand to grow. Any further voices joining Michael Saunders’ and Dave Ramsden’s admonishment of the need to be wary of the need to curb inflationary pressures could see GBP move to re-test recent highs.

Discussion and Analysis by Charles Porter

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