Talking Points
- GBP/USD has hit its highest level since September 2016 but the climb could well continue.
- Much will depend on what the Bank of England says Thursday but unless it’s unexpectedly dovish the pair could well top 1.34 in due course.
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GBP/USD has been climbing relentlessly since mid-January this year, reaching its highest level since September 16, 2016, at least in part due to a weaker US Dollar. However, there is little sign yet of the advance running out of steam and the high of 1.3446 reached on September 6 last year is now well within reach.
As the chart below shows, the relative strength indicator (RSI) is at its highest for three months but is not yet above 70, signalling the pair has been “overbought”. And the latest IG Client Sentiment data are not yet sending a “sell” signal, showing shorts outnumbering longs by 63% to 37%.
We typically take a contrarian view to crowd sentiment, and the fact traders are net short suggests GBP/USD prices may continue to rise. Traders are further net short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bullish contrarian trading bias.
Chart: GBP/USD Daily Timeframe (Jul 25, 2016 – Aug 1, 2017)
While Brexit remains a worry for some, British politics are in less turmoil than they are in the US, where the comings and goings in the White House, the row between Washington and Moscow, and North Korea’s missile tests are all damaging sentiment.
This Thursday, the Bank of England will likely announce it is leaving its benchmark interest rate at 0.25%, its asset-purchase target at £435 billion and its corporate bond target at £10 billion. Admittedly, the central bank’s monetary policy committee could split 6-2 in favor of leaving rates where they are rather than raising them, compared with 5-3 last time, but that would be unlikely to damage sentiment.
More important will be whether the bank’s quarterly Inflation Report revises its growth and inflation projections and the tone adopted by Governor Mark Carney at his post-meeting press conference. However, barring some unexpectedly dovish comments, the day could well pass without interrupting GBP/USD’s solid advance.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at martin.essex@ig.com
Follow Martin on Twitter @MartinSEssex
I’ll be covering the Bank of England’s decision live Thursday in a webinar starting at 1045 GMT. If you’d like to join me you can sign up here.
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