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The Sterling Lining Presents a Glimmer of Hope after Dollar, Yen Drubbings

The Sterling Lining Presents a Glimmer of Hope after Dollar, Yen Drubbings

James Stanley, Senior Strategist
The Sterling Lining Presents a Glimmer of Hope after Dollar, Yen DrubbingsThe Sterling Lining Presents a Glimmer of Hope after Dollar, Yen Drubbings

Fundamental Forecast for British Pound: Neutral

Data this week, on net, was pretty much a positive for the UK and the British Pound. Employment data came in above line on Tuesday, Retail Sales beat expectations by a wide margin on Thursday and even monthly CPI, the boogeyman around the topic of rate hikes out of the UK, came in better than what analysts were looking for. But none of that mattered: The Sterling got crushed against both the US Dollar and Japanese Yen after each Central Bank started what looks to be the long and arduous road of removing ‘emergency-like’ accommodation from the global economy. GBP is currently off by over 320 pips against both USD and JPY, and if anything, this should highlight which drivers should take precedence in this ZIRP-fueled, ‘normalizing’ global economy. These themes are likely going to continue for a while, somewhat of a return of the ‘risk on/off,’ trades from years past, as the Federal Reserve is looking at a whopping four rate hikes in the calendar year of 2016. This is quite a distance away from the two rate hikes that the street is looking for, so expect volatility around risk trends to continue.

The good news for Sterling-traders going into next week is that data is light and the holiday on Friday will likely bring a much-needed sense of calm after the ‘historic’ rate hike on Wednesday. And perhaps more to the point, there’s possibility of a reversal in GBP-prices as the positive data this week was pretty much overrun by the driving themes of USD and JPY strength. The big data point out of the UK is the Final revision for 3Q GDP on Wednesday. But because this is a final print, it’s not likely to be ground-breaking; and perhaps more importantly, this could be that small impetus that traders need to bid GBP.

It’s the technical perspectives that make this so utterly interesting GBP/USD has found support just below a vaulted psychological level at 1.5000, and GBP/JPY is a short distance away from its own ‘big level’ support barrier at 180.00. These could both present attractive risk-reward setups on the reversal.

However, those larger overall risk trends will likely be significantly more important than any simple technical inflections; and those risk themes appear to be on the verge of bursting through the seams. With a holiday week for a world full of risk, this may not be the time to press. So we’re taking a neutral stance due to fundamental risk despite the attractiveness of the technical setup.

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