6th December - How strong is the Pound?
09 December 2013
TECHNICALS:
MONTHLY Cable chart
The market is poised to complete rather than having clearly broken the continuation Triangle in the Monthly FX chart against the Dollar.
DAILY Cable CHART
This detail is more encouraging for the bears... But still lacks a clear breakout.
Daily Sterling Euro chart
The Sterling is in a clear strengthening trend against the Euro, but it is tentative and lacks a sense of clear structural breakdown.
So all the dynamism for Sterling lies in the Cable rate – and that will only be unleashed if the long and short term patterns there are successfully completed.
FUNDAMENTALS:
One of the biggest surprises for many this year has been the strength of the UK’s economic recovery. Only a few months ago the UK Chancellor was being warned by international bodies to scrap his economic plan A and devise a plan B to avoid plunging the economy into recession.
But now, as the year closes, it is clear the Chancellor was right and his critics inside UK politics and externally were wrong. Q3 GDP expanded at 0.8%. If the UK measured it’s GDP on an annualised basis like the US and Japan growth would read as 3.2%; that is a good effort from an economy that earlier this year seemed to be standing on the edge of a triple dip recession.
In the event, not only was a triple dip avoided, but as data has been revised, the economy never suffered a double dip either. The good news from all of this is that job growth is strengthening to a degree where the Bank of England may soon have to recalibrate its forecasts of when to start raising interest rates.
For the government, stronger growth means higher tax revenues, a falling deficit; a surplus is now forecast for 2018-19 and a debt to GDP ratio that can begin to correct lower.
But all of this good news has implications elsewhere. The Eurozone recovery remains barely visible and the US economic recovery is still not as vibrant as the authorities there would like. That means that the ECB in the Euro zone is toying with negative interest rates and the US Fed still can’t make it’s mind up whether to taper, if at all, before the New Year.
The impact on currencies is clear. The Pound Sterling has staged a recovery against both the US Dollar and Euro. If current growth disparities remain, Sterling Euro will strengthen to below 0.8000 in the early months of next year and Cable could well correct back above 1.7000.
This is important for the inflation outlook in the UK and therefore the path of interest rates. Clearly if the Pound can revalue higher, consumers will benefit from cheaper imports and keep a lid on inflation, this in turn will allow the Bank of England a little more time to keep interest rates at lower levels.
So although a stronger Pound could suck in cheap imports, interest rates maintained at lower levels than would otherwise be the case amid a strong recovery will help domestic industry and help improve living standards, while at the same time keeping the cost of the governments debt servicing down allowing a faster adjustment of the debt to GDP ratio.
How likely then is it that Sterling can continue its recent rally?
The Pound is a fairly volatile currency, with a wide longer term trading range as has been seen over recent decades. It has on several occasions in the last 20-30 years hit 2.0000 against the Dollar and higher, it has also plumbed the depths when back in February 1985 it hit a low of 1.0500 against the Dollar.
So the recent bout of weakness against the Dollar and Euro is nothing new. Moreover the Pound has demonstrated many times that it can respond reasonably quickly to the changing fortunes of the UK economy.
The UK has this year finally emerged from a prolonged period of economic weakness that dragged the Pound lower on the foreign exchanges, now as UK growth matches and surpasses its peers we expect the Pound to rally further to reflect this.
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12th Dec - Natural Gas Gains Spur the Bulls 
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29th Nov - GBP/USD Breaks Through L/Term Resistance