- The Sterling is still one of the best performing majors over the past month with both Brexit and BoE pace supporting lift
- As supportive as recent events have been, the combination will not be an endless well of strength
- If Brexit troubles pick up again or BoE warns of an uncompetitive rate pace, there are many GBP technical break points
There have been some remarkably strong performances amongst the majors that have unfolded at different tempos. The Euro has been the 2017 champion with speculation of a turn in monetary policy arising from anticipation of a global turning policy tides. For the past quarter, the leader has been the Canadian Dollar which was driven by consecutive rate hikes from the Bank of Canada. For just the just the past month, I'd assign that title to the British Pound. While the currency was generally drifting higher for some months owing to assumptions that the onus of Brexit was fading - or at least the worst case scenario was already priced in - there was a particular intensity added to the bid for September. Important to that charge was the Bank of England's recent upgrade to rate expectations.
At present, the Bank of England carries the highest probability amongst the major central banks for a 25 basis point rate hike by the end of the year. That is a dramatic turn in forecast from just a month ago. On that basis, the Sterling does deserve to recover some ground. However, we have assess how much lift a measured hawkish outlook deserves considering there are other central banks that are on the same track. The Fed and BoC are two such banks. Speculation of a not-too-distant turn to hawkish policy for the ECB, RBA and RBNZ is also obvious in rate forecasts through 2018. There is value assigned to a first mover, but it is not unlimited - just as the Dollar. Meanwhile, the Brexit optimism comes with a heavy pinch of salt. After Prime Minister Theresa May's speech last week, the fourth round of Brexit negotiations were held this week. EU chief negotiator Barnier assessed this past session that while the conversation was livened, they were likely still months away from discussing trade.
If the Pound were still near its lows of the past few years and the BoE/Brexit forecast were just starting to turn higher, I would say that we had remarkable potential for the Pound to advance with momentum pushing through minor concerns. However, we have already seen some of the excess discount priced out. If conditions do indeed prove as hawkish as recent changes in theme have suggested, there is plenty of rise still lift. However, there are no straight lines in markets or fundamentals. The leading probability is still a bullish move moving forward, but it is not heavily weighted that way. What's more, with recent advance, the potential for bullish trends is not as large as the drive if the market's slip back to the bears. There are a lot of clear technical boundaries to mark for the bears. I'm looking at GBPUSD, EURGBP, GBPJPY, GBPAUD, GBPNZD and GBPCAD in this Quick Takes video.
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