The pound was one of the weakest performers in the FX space this week. To put this into perspective, it fell against all the other G10 currencies, on a broader basis, the Russian ruble and Argentinian peso even managed to out-perform sterling. The only other currencies that were weaker than the pound were the Israeli shekel and the Turkish lira.
The latter was sold after Prime Minister Erdogan won the country’s first direct Presidential election, fuelling fears that he will go on a power grab, while the shekel is still reeling from the Israel/ Palestine conflict. The pound has been falling steadily since its peak on 15th July, the trigger for the latest sell off was the Bank of England’s August Inflation Report, which was more dovish than some expected.
However, increasingly it seems like the market has fallen out of love with the pound, and after a year-long rally the uptrend may be over.
Up-trends don’t last forever, and a less hawkish BOE could be enough to send the pound southwards. However, as much as we understand why the market is taking profit, we don’t think the pound will fall in a straight line from here. The reason is that the economic data hasn’t been that bad, GDP for Q2 jumped 3.2% on an annualised basis, well above rates for the Eurozone and Japan, and the pound is still an attractive option from a fundamental basis.
We will wait for next week’s BOE minutes to see if all members of the MPC are on board with Carney’s dovish style. While we believe that all members will be worried about the recent contraction in wage growth, some may think this is temporary and may suggest that they are getting ready to vote for rate hikes in the coming months. If this happens then we could see a sharp reversal in the pound, especially after the recent sell -off.
The technical picture is also worth watching. On Thursday it dipped to its lowest level in 4 months, however it has, so far, managed to hold above key support at 1.6667, the 200-day sma, on Friday. This suggests some reluctance to push the pound any lower, which could be triggered by two factors.
Firstly, there is some profit taking going into the weekend. And, secondly, some scepticism in the market about just how dovish the BOE is, especially as the economic data is not uniformly weak. Crucial support is 1.6633 and then 1.6556 – the low from April 4th. On the upside, any recovery on the back of this week’s minutes could see a reversal to 1.6844 initially, the August 13th high.
So, as we head into a new trading week, a rebound in the pound could be one of the major FX opportunities in the market. Wednesday’s BOE minutes are worth watching closely.
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